Report No: 53322-MU Mauritius Enhancing and Sustaining Competitiveness Policy Notes on Trade and Labor December 3, 2010 Poverty Reduction and Economic Management 1 Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ii CURRENCY EQUIVALENTS (Exchange Rate as of February 23, 2010) Currency Unit = Mauritius Rupee US$ 1.00 = Rs. 31.38 GOVERNMENT FISCAL YEAR January 1 – December 31 (starting 2010) July 1- December 31 (2009) July 1 – June 30 (prior to July 2009) Vice President: Obiageli Katryn Ezekwesili Ag. Country Director: Constantine Chikosi Ag. Sector Director: Jan Walliser Sector Manager: John Panzer Lead Economist: Jacques Morisset Team Leader: Fabiano Bastos iii ABBREVIATIONS AND ACRONYMS BOI Board of Investment BOM Bank of Mauritius BPO Business Process Outsourcing CMPHS Continuous Multi-purpose Household Survey COMESA Common Market for Eastern and Southern Africa CPE Certificate of Primary Education EAP Eradication of Absolute Poverty EPZ Export Processing Zone EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product HBS Household Budget Survey HRDC Human Resources Development Council IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment ICT Information and Communications Technology IOM International Organization for Migration IT Information Technology LGS Levy Granting Scheme LST Life Skills Training IMF International Monetary Fund KPO Knowledge Process Outsourcing LPI Logistic Performance Indicator MOFED Ministry of Finance and Economic Development MQA Mauritius Qualification Authority MTEF Medium Term Expenditure Framework NEF National Empowerment Foundation NTB Non-Tariff Barrier OECD Organization for Economic Co-operation and Development PBB Program based Budget PMS Performance Management System PPP Purchasing Power Parity PTP Placement for Training Program Rs. Mauritius Rupees SME Small and Medium Enterprises TEC Tertiary Education Commission TFP Total Factor Productivity WB World Bank WTO World Trade Organization iv Table of Contents Acknowledgment............................................................................................................................... ............vi Executive Summary............................................................................................................................... ....... vii Setting the Stage ............................................................................................................................... ..............1 A History of Success ............................................................................................................................... ...1 Responding to Challenges by mid 2000 and Facing the Global Financial Crisis.......................................3 Looking Forward ............................................................................................................................... .........8 The Trade Regulatory Framework for a Dynamic Global Competitor: The Case for Reform in Mauritius13 Mr. Reza is a Small Mauritian Exporter…...............................................................................................13 The Iceberg of Trade Policy: From Top to Bottom..................................................................................13 Why moving? ............................................................................................................................... ............20 What to do?............................................................................................................................... ................22 Labor Markets: Embracing Transformation for Continued Job Creation for All.........................................28 Marie, 45 years old, has lost a twenty-year-long job in the textile factory…...........................................28 A well functioning labor market...............................................................................................................28 Low-end of the market: What to do with unskilled workers? ..................................................................34 High end of the market: high tech firms need qualified workers .............................................................40 Concluding remarks and summary of policy recommendations ..............................................................49 References ............................................................................................................................... .....................54 Appendix ............................................................................................................................... .......................56 Juhn-Murphy-Pierce decomposition: .......................................................................................................56 Observable and unobservable components of change in labor income inequality ...................................57 Returns to Education ............................................................................................................................... .58 Indexed real hourly earnings ....................................................................................................................59 Changes in labor income and labor supply...............................................................................................60 v List of Figures Figure 1: GDP Per Capita; Figure 2: GDP Per Capita Growth ......................................................................1 Figure 3: Growth Accounting......................................................................................................................... 3 Figure 4: GDP Growth – Rolling 5-Year Average.........................................................................................5 Figure 5: FDI Inflows............................................................................................................................... ......6 Figure 6: Exports 1992 (Constant Value).....................................................................................................10 Figure 7: External Vulnerabilities ................................................................................................................10 Figure 8: Export of Goods and Services; Figure 9: Mauritius Export Profile.............................................13 Figure 10: Time to Export and Import..........................................................................................................19 Figure 11: Logistics Performance Indicators 2010 and Figure 12: LPI Components ..................................20 Figure 13: KOF Economic Globalization (2007) .........................................................................................20 Figure 14 and 15: Employment creation… faster than labor force and economic growth and..................29 Figure 15: Employment Share of Selected Sectors Figure 16: Net Employment Changes...................30 Figure 17: Labor Market Performance .........................................................................................................33 Figure 18: Capital-Output Ratio and Figure 19: Employment Absorption and Capital Intensity ................41 Figure 20: Vacancy Distribution ..................................................................................................................42 Figure 21: Returns to Education...................................................................................................................49 List of Tables Table 1: Key Outcomes ............................................................................................................................... ...5 Table 2: Trade Policy Performance ..............................................................................................................14 Table 3: Job Flows in Selected Sectors ........................................................................................................30 Table 4: Programs Created to Support Economic Adaptation since 2006 (Additional to already existing social assistance programs – over 50 programs) ..........................................................................................36 Table 5: Level of Education of the Unemployed trained and Placed ...........................................................38 Table 6: Wage Level Comparison................................................................................................................48 List of Boxes Box 1: Key Reforms (2006-2009).................................................................................................................. 5 Box 2: Mauritius’ Resilience to the Global Financial Crisis..........................................................................7 Box 3: Labor Market Shortage .....................................................................................................................11 Box 4: Use of Standards ............................................................................................................................... 17 Box 5: The Efficient Regulation Principles at OECD..................................................................................23 Box 6: Regulatory Reform ...........................................................................................................................25 Box 7: Managing Migration – Adapting Lessons from The Filipino Experience ........................................39 Box 8: A Study on School-to-Work Transition of Graduates from the University of Mauritius .................46 vi Acknowledgment The World Bank team, led by Fabiano Bastos, was composed of Jacques Morisset, Sawkut Rojid, Paul Brenton, Michael Jensen, and Mariem Malouche. General guidance and supervision was provided by John Panzer. The team relied on support from Maria Teresa Benito-Spinetto, Feda Kebede, Sara Sundaram and consultants Damien Echevin and Vishal Jaunky. It also benefited from conversations with Bank colleagues Itzhak Godberg, Giuseppe Iarossi, Smita Kuriakose, Milan Vodopivec, Robert Chase, Phillippe Leite, Constantine Chikosi, and Khoudijah Maudarbocus-Boodoo. Mariella Beugue provided excellent logistical support from the country office. Peer reviewers were Richard Newfarmer, Stefano Paternostro and Olivier Cadot. Many people in the government and private sector in Mauritius generously provided their views and valuable information for this study: Mr. Bhuglah, Mr. Boodhoo, Mr. Luximon, Mrs. Ramsamy, Mr. Ramlugun, Mr. Aubeelack, Mr. Mansoor, Mr. Bassant, Mr. Imrit, Mrs Sooben, Mr. Deerpalsing, Mr. H. Bundhoo, Mrs. Cassimally, Mr. Hosany, Mrs. Ramchurun, and Mr. Makoond. Special thanks to the students from the University of Mauritius who kindly agreed to participate in a roundtable discussion about their professional aspirations after graduation. Apologies for any omissions from the list. The team has also benefited from close collaboration with Development Partners. In particular, the Agence Française de Développement (AFD), the African Development Bank (AfDB), the European Commission (EC), and the United Nations Development Program (UNDP). The AfDB has co-financed one of the background studies for chapter 3, and Carlos Mollinedo (AfDB) has provided useful comments. vii Executive Summary Mauritius is a well known successful development story… The country’s GDP per capita rose from 38 percent below the world average in 1981 to 16 percent above the average by 2008. Such a performance is not the fruit of luck or use of natural advantages as it was accomplished through man-made efforts and policy actions. The combination of (i) active industrialization policies together with opportunistic use of preferential trade access; and (ii) participatory institutions that assured voice and rent redistribution across the society ensured labor intensive growth and the emergence of a virtuous cycle in development. … but its traditional growth engines were gradually failing over time. GDP growth started a structural decline in the early 1990s, which intensified between 2002 and 2005. Unemployment rates were rising and macroeconomic stability was also at a greater risk with an increasing public debt. This somber outlook was further reinforced by the end of the Multi-Fiber Agreement (MFA) for textiles (December 2004), the phase-out of the EU guaranteed price of sugar (between 2006 and 2010), and sharp rises in oil and food prices. Mauritius knew what needed to be done… A National Long-Term Perspective Study (NLTPS), also known as Vision 2020, started in 1990 and was completed in 1997. The goal of opening up and diversifying the economy by moving towards high value-added, skill and knowledge intensive service sectors was already well articulated in the study - with explicit reference to the potential of “computer services” which today is embedded in the ICT sector. Themes such as sustainable environment, ocean exploration, and financial services that are highly relevant today were also covered. … but political resolve was necessary to tackle difficult areas of reform and promote policy continuity. Since the 1990s, successive governments moved in the direction of openness, diversification and service sector development. In 2006, a bold package of policies and institutional reforms was announced, deepening many of the efforts initiated in the preceding years by tackling some politically risky areas. Implementation has been very successful and fundamental improvements to the macroeconomic policy framework and to the overall regulatory environment took place. The economy reacted favorably to the reforms by displaying recovering growth and employment, which helped to consolidate consensus and public support around the government’s program. While further momentum to the reform agenda was given by the government in 2006, it is also important to emphasize that Mauritius development success is a story policy continuity that stretches well before 2006. The Global Crisis in 2008 was a threatening reminder of vulnerabilities…. Mauritius is structurally vulnerable to external shocks. With a small domestic market unable to promote or sustain production growth by itself and a high dependence on raw materials, food and energy imports, the country is necessarily tied to developments in the world economy. The 2008 Global Crisis implied substantial challenges and, by the end of 2008, the economic outlook for Mauritius was gloomy. Threats to domestic output and employment were severe. Major imbalances on external accounts were feared to be imminent and intractable fiscal pressures thought to be almost inevitable. … but economic resilience was a testimony to the benefits from reforms. The country displayed impressive resilience to the shocks. Economic performance did not collapse, unemployment rate increased only mildly, and fiscal stability has been preserved so far. The implementation of the reform agenda since viii 2006 is at the core of the Mauritius’ resistance because it reinforced economic diversification which helped to sustain overall economic activity as more traditional sectors faltered. Reforms also favored investor confidence in Mauritius and willingness to cope with temporary shocks, as the country remained fundamentally attractive to investors. Last but not least, a process of creative destruction since 2006 meant that the private sector as a whole was better positioned to cope with turbulences. These fundamental long- run changes were further supported by timely, targeted and temporary short-run policies to stimulate demand and protect jobs. Though vulnerability to the world economy continues to be a factor, Mauritius is well positioned in the aftermath of the global crisis. Domestic economic rebound in 2010 and 2011 will remain highly dependent on how global demand and private capital flows will evolve. The nascent world recovery is still filled with uncertainties and further turbulences can bring substantial challenges to Mauritius. The country has kept its reform focus throughout the crisis and sustained on-going key initiatives for long-run growth such as (i) ambitious infrastructure programs to improve connectivity with world markets, (ii) modernization of the public sector to improve service delivery and efficiency, and (iii) measures to promote competitiveness, investment climate, and skills development in the labor force. An overarching challenge for Mauritius to achieve the envisaged transformation towards a higher value added economy and sustain economic growth is to improve its productivity performance. This report focuses on two key fundamental instruments for that: (i) trade policy and (ii) labor policy. (a) Trade policy. Past trade reforms focused on reducing tariffs and visible non tariff barriers, but there is still much scope to improve the policy and regulatory environment to support Mauritius as a dynamic global competitor on international markets. It is necessary to further reduce costs of operating for exporters, and stimulate spillovers from exporting to domestic firms. (b) Labor policy. Labor markets in Mauritius have performed well since job creation has exceeded the labor force growth over the past few years. The labor market also endured relatively well the impact of the Global crisis. However, the ability of unskilled workers to adapt to the transformations in course (low end of the market) and the capacity to generate and absorb high- skilled workers (high end) pose important challenges for Mauritius. These two ends of the labor market merit further attention from policy-makers. Each of these two policy areas is important in itself, but maintaining the proper balance and synergies in implementation of trade and labor policies is critical for two reasons. First, there is a need to maintain a balance between the competitiveness and social agendas, so that the support in favor of reforms continues over time. Second, trade and labor policies work together in promoting productivity- enhancing reallocation of resources and gains. This causal link goes in both directions: higher skilled labor favors competitiveness that in turn promotes trade, while exporting firms are well positioned to absorb new technologies and competencies and so encourage labor skills upgrade and employment. The policy recommendations outlined below summarizes key findings presented in the report and are divided into two sections – recommendations to improve regulatory environment affecting trade and recommendations to support inclusive and robust growth through labor markets. ix Recommendations to Improve Regulatory Environment Affecting Trade (a) Empower the champion. It is recommended that the NTB Review Committee be empowered to shape the trade-related policy environment. Successful international experiences in regulatory reform show that high-level coordinating bodies play an important role in leadership and coordination. In the case of Mauritius, the committee can also provide an important platform for building consensus and overcoming vested interests or organized opposition. (b) Use bottom-up incentives. In parallel to coordinating efforts from the top (NTB Review Committee), encourage administrations and agents with regulatory power to adopt new ideas that streamline procedures. Successful international experiences include monetary incentives and annual prizes as mechanisms to stimulate administrations to reform themselves. (c) Put the private sector at the center of the reform process. Public sector needs to adopt a client- oriented mindset. Introduce an appeal mechanism allowing the private sector to dispute procedures and administrative decisions, as well as promoting quick and transparent dispute resolution mechanism with a perspective of promoting competitiveness. This is particularly important for SMEs who are ill equipped to engage in costly disputes. (d) Use IT solutions to promote transparency, control/supervision and coordination in the regulatory reform process. Continued support to the E-Government initiative to deliver quality services to citizens and the business community is important. Such initiative can also be used to facilitate exchange of information regarding regulatory policy, fostering public participation and stakeholder involvement. Extending electronic processing to all import and export administration (not only customs) has proven to be a powerful trade facilitation measure in other countries. (e) Review use of mandatory standards and consolidate metrology activities to improve coordination in the provision of standards services. The use of mandatory standards and technical regulations by MSB and line ministries should follow international good practices and focus on safety, health, and environment hazards. The standard system should not be an indirect form of trade protection and quality issues should be addressed through voluntary standards. Recommendations to Support Inclusive and Robust Growth Through Labor Markets (a) Give priority to tackle education bottlenecks in primary and secondary education. Pass rates for primary and secondary exams remain low and not improving. These are not new problems, yet they demand resolution given their long-term impact. It is important to strengthen the lines of communication between the Ministries of Finance and Education and leverage PFM reforms to achieve results. The bottlenecks in primary and secondary education also relate to the level of cognitive skills in math and sciences among students. It is important to participate in international benchmarking of student performance to inform policies. (b) Continue to support youth with low education attainment to alleviate poverty and reduce labor market vulnerability. Life Skills Training (LST) programs should play a central role in an active x labor market policy targeting the unskilled. On-going work from the World Bank is focusing on articulation of pathways between TVET and general education. This is important, especially as consideration is given to the stock of students that have failed the CPE exams. Special migration arrangements should continue to be used to help place abroad those unskilled or semi-skilled workers with weak employment prospects at home. (c) Refocus social protection to ensure efficient targeting and that the most poor and vulnerable are not left unattended. Apply quasi-experimental impact evaluation techniques to key programs to inform reforms. It is also important to recognize the linkages between the existing welfare state and incentives for labor market participation among unskilled workers. Under the leadership of the Ministry of Social Security, on-going support from the UNDP and World Bank on poverty analysis can help to further clarify trade-offs faced by the policymakers. (d) Tailor active labor market programs for skilled workers. The National Empowerment Foundation should continue to capitalize on the successful Placement for Training Program. The design of the training component and the ability to identify promising matches between firms and workers are valuable competencies to perfect. Additionally, the Levy Grant Scheme (LGS) should be strategically used to promote the acquisition of higher skills along the value-chain over the lifetime of the worker. Collaboration between HRDC and BOI should help to identify potential entrants in emerging sectors that are holding back on initial investments due to lack of specific skills and preventing upward movement in the technology ladder. HRDC should also evaluate workers and firms performance in response to the LGS with the view to assess and improve effectiveness of the program. (e) Enhance links with university students. Mauritius should nurture the interest of its talented young nationals on acquiring international experience. For instance, awarding merit scholarships for recent university graduates to study abroad after they fulfill a requirement of spending a short stint (1-2 years) working in emerging sectors of the Mauritian economy. Such initiatives would strengthen early linkages with Mauritians who in the medium-run would become part of the high- skilled diaspora. The government should track experiences of recent university graduates in the domestic markets, through collaboration and systematically use information to inform policies. Collaboration between HRDC and TEC with analytical support from Development Partners could provide the platform for such studies. (f) Develop innovative data gathering exercises on the high-skilled Mauritian diaspora to inform policy. Possible options are: (i) explore partnership with foreign governments to use existing administrative datasets and/or surveys of the host countries containing nationality information (this may include history of student visa applications); (ii) explore collaborative partnerships between BOI, embassies and consulates to identify and approach high skill Mauritians abroad; (iii) build upon the networks of nurse practitioners (particularly in the UK) to support development of the medical services sector in Mauritius; (iv) work with selected universities that usually receive Masters and PhD Students from Mauritius to compile a list of graduates; (v) contact workers presently in Mauritius who studied abroad and may have developed contacts with high skill nationals living overseas. Setting the Stage A History of Success 1. Mauritius economic performance has been a success story. In 1981, GDP per capita measured in 2005 constant international $ (PPP) was 38 percent below the world average. By 2008, it had risen to 16 percent above the average. Over that period, GDP per capita in Mauritius more than tripled in real terms with growth rates that consistently outperformed world and middle income countries average growth. In terms of constant US$ (2000), Mauritius went from US$ 300 GDP per capita in 1968 to about US$ 5,000 in 2008. This represents a cumulative growth rate comparable to the ones observed in Singapore, Hong Kong, China or Taiwan, China. Figure 1 Figure 2 12000 GDP Per Capita (PPP) 10.00 GDP Per Capita Growth 10000 8.00 Constant 2005 International $ 8000 6.00 6000 4.00 % 4000 2.00 2000 0 0.00 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Mauritius Middle Income World 2.00 Mauritius Middle Income World Source: World Bank 2. Such a performance is not the fruit of luck or use of natural advantages. Mauritius is a small island country located far from main industrial markets without natural and/or mineral resources that could be feasibly exploited to support growth. Hence, in 1968 (at time of independence), development predictions were pessimistic.1 Mauritius managed to beat the odds through man-made efforts and policy actions. This is well documented and generally explained by the combination of (i) active industrialization policy together with opportunistic use of preferential trade access; and (ii) democratic and participatory institutions that assured voice and rent redistribution across the society.2 3. Successful economic policy relied on three key ingredients that reinforced each other: (i) trade policy, (ii) investment growth; and (iii) institutions that helped to distribute the benefits from job creation. 1 The most cited reference used to illustrate this point is the report prepared by the Economics Nobel prize winner Jean Edward Meade’s in 1961. Meade argued that the output for peaceful development in Mauritius was poor due to heavy population pressure and potential for ethnic-based political conflict. 2 See Subramanian and Roy (2001) for a succinct recount and discussion about explanations for the Mauritian development success. 2 4. Trade policy has been a deep determinant of investment and output dynamics. After briefly entertaining the option of a purely import-substitution model in the 1960’s, Mauritius quickly turned to an export-oriented growth strategy. The EPZ act of 1970 established a myriad of incentives to exporting-only firms, such as duty-free imports, tax breaks, subsidized utilities, access to concessional credit, liberal policy for repatriation of profits/dividends, and cheap semi-skilled labor with flexible regulations. This initially segmented the economy in two: (i) a tariff-protected sector catering for the domestic market and (ii) an exporting-only sector that benefited from preferential access to international markets (sugar and textile). Overtime, the weight of the tradable sector has augmented as the share of international trade in GDP went from around 100 % in the early 1980s to over 130% in 2007-08. This shift has been gradual through the balanced use of trade policies supporting integration to the global economy with measures to maintain and diversify the dual-economy model. This proved to be a winning formula for the country whereby trade policies fed into strong investment pace and growth. 5. Physical capital accumulation has been the key driver of the Mauritian economy overtime. Growth accounting techniques suggest that GDP growth in Mauritius has been led by input accumulation as opposed to increases in total factor productivity. Physical capital has been particularly dominant, accounting for 72% of output growth between 1984 and 2008; while human capital accounted for 24% and total factor productivity (TFP) only 4% (see Figure 3). Despite notorious limitations to growth accounting exercises,3 the leading role played by physical investment is a well established stylized fact in Mauritius - also confirmed by productivity statistics published by the Central Statistics Office. This result is consistent with theoretical explanations for a less developed economy that is converging to a higher GDP per capita equilibrium.4 Nonetheless, the recent experience of emerging economies has shown that TPF has been generally a higher contributor to growth, accounting for example as much as 35 percent in Hong Kong over the period 1970-91. 5. Going forward, Mauritius will need to rely more heavily in improvements in TFP to sustain growth, especially in the context of the transition towards a high-valued added economy. 6. Labor intensive growth and redistributive institutions helped to support continuity of policies. Much of Mauritius growth was labor intensive. For example, textile firms in the EPZ sector grew fast supported by direct incentives to reduce the cost of labor and the leveraging of production scale via preferential access to international. The thriving EPZ sector also allowed though its linkages to the development of a non-competitive and protected domestic manufacturing sector which absorbed workers as well. All while the government social policies sought that the rents generated from trade preferences were used to build a welfare state that not only provided universal health, education and (non- contributory) pension, but also reached deep to all segments of society through a web of social assistance programs. All of the above led to shared growth and assured continuity of policies under alternating democratic forces. 3 The famous debate about the sources of growth in East Asia has not been fully settled and provides an illustration of potential shortcomings. Authors like Young (1992) and Krugman (1994) use different growth accounting techniques to stress the dominant role of physical capital accumulation in the process, while others such as Rodrik (1996) question how well labor-augmenting technical change can be separated from physical investment. 4 In particular, the canonical Solow model illustrates how an economy can grow its GDP per capita solely through capital accumulation without TFP growth as it converges to the steady state 5 See Young (1992) and Ferreira et al. (2004) for further comparison. The only notable exception has been Singapore where TPF growth has played a marginal role. 3 Figure 3 Source: World Bank and Staff Calculation 7. Mauritius’ path towards development mirrors general features from other successful developing economies. The 2008 Commission on Growth and Development report identified 5 common features among 13 case studies of growth success stories.6 During their respective periods of fast growth, all the 13 countries (i) fully exploited the world economy, (ii) maintained macroeconomic stability, (iii) mustered high rates of saving and investment, (iv) let markets allocate resources, and (v) had committed, credible and capable governments. To some degree, Mauritius displayed all five features. However, market-led resource allocation was limited since industrial policy and opportunistic trade strategies deliberately channeled resources to preferential market access. This made sense because Mauritius has no scale, is an island far from markets and was already tenfold richer than China during the 1980’s in terms of GDP per capita – which indicates that competition purely on wage levels would not be feasible. Responding to Challenges by mid 2000 and Facing the Global Financial Crisis 8. The Mauritius growth model, while still performing reasonably well, was reaching its limits by the mid 2000. GDP growth started a structural decline in the early 1990s. This intensified between 2002 and 2005 as average GDP growth was 3.3 percent, considerably lower than the above 5 percent average experienced before. Moreover, as the first years of the new millennium were marked by a very strong world economy, Mauritius low growth rates showed that the country was failing to capitalize on a very positive external environment. Indeed, figure 4 shows that after 2003 average growth rates for middle income countries outpaced the ones from Mauritius for the first time since the mid 1980s. Unemployment rates were also rising in the years leading to 2005. In particular, female unemployment rate went from 9.5 percent in 2001 to 16.4 percent in 2005 – though male unemployment remained broadly stable. Macroeconomic stability was also increasingly at risk with public debt reaching 70 percent of GDP. 9. In the midst of weakening domestic performance, the external environment was also affecting Mauritius and, as a result of world trade reforms, trade preferences started to be phased- out. The Multi-Fiber Agreement (MFA) for textiles was eliminated in December 2004. The EU 6 Success stories are defined on the basis of fast and sustained growth on the post-war period (annual GDP growth of 7 percent or more over a period of time). The 13 countries are: Botswana; Brazil; China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand. 4 guaranteed price of sugar was scheduled to fall by 36 percent between 2006 and 2010 (which in fact occurred). Oil and food prices were on a sharp rise by mid 2005. Combined, all these factors implied a 20 percent negative shock to Mauritius’ terms of trade between 2000 and 2005. The new Government elected in 2006 faced the arduous task of reversing the decline in the pace of economic growth. Its underlying reform agenda was, in fact, inspired on a long-run strategy conceived during the 1990’s.7 Since then, successive Governments moved in the direction of openness, diversification and service sector development. However, piecemeal reforms did not tackle fundamental (and politically risky) bottlenecks and results did not materialize. Hence, Mauritius was confronted with the urgent need to accelerate reforms towards a new development model. 10. In 2006, a bold package of policies and institutional reforms deepened in important directions the long standing strategy of the country to leverage external markets and attract foreign investors. Reforms and pro-active policymaking in Mauritius started well before 2006 as briefly discussed above. The understanding that the country needed to fully leverage opportunities in overseas markets to attract investment and grow has been a constant feature of successive governments. Nonetheless, the world landscape has evolved and changing opportunities forced the country to adapt its strategy. The ambitious reform program launched in 2006 included changes in virtually all important aspects of the economic life but provided continuity to the country’s long standing approach of strategically using external markets and investors in favor of development. The 2006 reform program was structured around four pillars: (i) fiscal consolidation and public sector efficiency; (ii) trade competitiveness; (iii) investment climate and (iv) widening the circle of opportunities. More importantly, the policy proposals brought around fundamental changes. In particular, substantial trade tariff cuts introduced more competition in the domestic economy, facilitated access to imported inputs and increased availability of consumption goods. Overall implementation of the program has been very successful and Box 1 lists key reforms by the end 2009. 11. The economy reacted favorably to these policies which helped to consolidate consensus and public support for the reform efforts. GDP growth averaged 5.3 percent annually between 2006 and 2008, recovering from the slowdown in the preceding years. The unemployment rate reduced from 9.5 percent in 2005 to 7.2 percent in 2008. Of special note is that female unemployment rate went down significantly from 16.2 percent to 12.7. Chapter 3 provides a review of how labor markets adapted over the recent years. A key driver of such positive performance was FDI inflows which increased above 4 percent of GDP (Figure 5). Such flows have also been more diversified, promoting the growth of emerging sectors such as ICT and Financial Intermediation together with the Tourism industry. The resolve displayed by the Government in implementing its reform agenda has increased the credibility of Mauritius as a friendly and progressive environment for private sector development. FDI growth was a reflection of this fact, but it is also important to highlight that buoyant external conditions over that period helped to boost private capital inflows as well. This was a key success factor. This time, and unlike the early 2000s, Mauritius was able to take advantage of the favorable external environment. 7 The strategy was articulated in the National Long-Term Perspective Study (NLTPS), also known as Vision 2020. Its origin can be traced back to the year of 1990, however preparation started only in 1994 after funding was secured. The NTLPS was completed in 1997 and was based on a network of Working Groups dealing with different themes. The goal of diversifying the economy by moving towards high value-added, skill and knowledge intensive service sectors was already well reflected in the study (with explicit reference to “computer services” which today is the ICT sector). Even the theme of sustainable environment theme was covered. 5 Figure 4 8.00 GDP Growth Rolling 5 Year Average 7.00 6.00 5.00 4.00 % 3.00 2.00 1.00 0.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mauritius Middle Income Source: World Bank Box 1: Key Reforms (2006-2009) Table 1: Key Outcomes 2006 2007 2008 2009 Consolidating Fiscal Performance and Improving Public Sector GDP growth 5.1 5.5 5.1 2.9 Efficiency Unemployment rate (%) 9.1 8.5 7.2 7.7 • Fiscal rule (public debt legislation) Total employed (000s) 515.3 523.7 543.0 544.8 • Public financial management reforms (MTEF, PBB, and PMS) Public sector debt/GDP 68.8 63 59.1 58.5 Trade tariff lines with 0 (zero) 74 79 80 87 • Revamping of tax system (single flat tax on personal and tariff rates corporate income) International Internet 123 153 226 226 Bandwidth (Mbps) Enhancing Competitiveness Tourist arrivals (millions) 0.78 1.1 1.22 1.1 • Trade tariff duties reduced Doing Business Rank 32 27 24 17 • Regulations for export processing zone (EPZ) and non EPZ firms Number of days to start 46 46 7 6 business unified Trained workers through NEF 0 821 4000 6230 • Improving telecommunication services Secondary Gross Enrolment 75 74 74 73 Ratio Improving the Business Climate Tertiary Gross Enrolment 34 37 41 n.a. • Business registration, regulation and insolvency revamped Ratio Source: CSO, Doing Business and MoFEE through new legislation GDP measured at factor cost • Restrictions on land acquisition by foreigners eased • New labor market legislation Widening the Circle of Opportunity through Participation, Social Inclusion and Sustainability • The National Empowerment Foundation as umbrella institution minimizing social costs of economic transformations. • Education reform launched • Background analytical work to improve efficiency of the social protection system 12. Successful reforms acted like a buffer when the Global Financial crisis hit Mauritius by end 2008. Mauritius is structurally vulnerable to external shocks. With a small domestic market unable to promote or sustain production growth by itself and a high dependence on food and energy imports, the country is necessarily tied to developments in the world economy. Given the non-diversified export profile still heavily reliant on textiles and tourism, combined with a high current account deficit (12 percent of 6 GDP in 2008) financed by private capital flows, Mauritius faced a significant threat when the Global Financial crisis hit. Yet, the country displayed impressive resilience to the shocks. Box 2 reviews the measures taken by the government and how the country managed to avoid collapses in output and employment. Consolidation of macroeconomic stability, economic diversification (particularly into ICT), and a business environment that is fundamentally attractive to investors were early outcomes of the reform program which gave Mauritius the necessary stamina during the crisis. Figure 5 FDI Inflows 6.00 5.00 4.00 % GDP 3.00 2.00 1.00 0.00 2001 2002 2003 2004 2005 2006 2007 2008 FDI - Financial FDI - Hotel and Restaurant FDI - Other Total FDI 13. The overall macroeconomic policy framework in Mauritius has remained highly conducive to growth. The latest IMF Article IV reports and analysis of macroeconomic policies prepared in the context of the World Bank Development Policy Loans series provide a positive picture of the country’s framework for fiscal, monetary and exchange rate policies. From the fiscal perspective, the 2008 Public Debt Management law has been an important underpinning of fiscal responsibility. It has effectively introduced a fiscal policy rule, forcing the government to keep the deficit in check and meet pre- announced targets. Public debt management has also been improved as the Central Bank and the Ministry of Finance stepped up collaboration to produce financing strategies in light of different risk scenarios for the country. Public financial management reforms (such as the introduction of Program Based Budgeting) and targeted process-oriented interventions (such as the creation of a Committee to streamline large public investments) have contributed to a more effective public spending. Sweeping tax reforms which created a flat VAT tax rate (15%) and simplified other taxes contributed to an improved revenue generation process. Fiscal outcomes reflected well the enhanced policy environment through a declining public debt and moderation of the deficit. Additionally, the government appropriated funds for rainy days which were particularly important during the crisis. 14. A monetary policy committee was set up at the Central Bank in 2007 to modernize monetary policy decisions along the lines of other developed economies – that is, policymaking based on forward- looking analysis and transparent discussions. The committee’s operation has evolved overtime and Mauritius has consistently tapped international expertise to support its functioning. As a small open economy, conduction of monetary policy has remained linked to international factors such as oil prices, food prices and interest rate differentials. A floating exchange rate regime has contributed to the effectiveness monetary policy and allowed the absorption of temporary shocks - the last IMF Article IV highlighted that the monetary and exchange rate framework is well-suited to the needs of the Mauritian 7 economy. There is constant concern from the exporting sector with local currency appreciation, but the Central Bank has resisted using interest rates with the objective of drive nominal exchange rates. According to the IMF, the real exchange rate has remained broadly aligned with the economy’s fundamentals. Box 2: Mauritius’ Resilience to the Global Financial Crisis Collapse avoided By the end of 2008, the economic outlook for Mauritius was gloomy. The reforms also favored investor confidence in Mauritius and Synchronized recessions across major world economies picked up at willingness to cope with temporary shocks. Hence, while investments an unprecedented speed in the months after September 2008. Threats were scaled down during the crisis, the country still remained to domestic output and employment were severe. Major imbalances on fundamentally attractive to the private sector. external accounts were feared to be imminent and intractable fiscal pressures thought to be almost inevitable. Additionally, economic policies since 2006 have sponsored a healthy process of creative destruction whereby some non-competitive firms A key concern was that the country could not rely on exports of goods faced pressure to adapt or exit the market. This has better positioned and services as a driver of investment and growth in the short-run. In the private sector as a whole to cope with difficult times and mitigated fact, between 1990 and 2007, Mauritian exports of goods and services financial costs of providing support to existing firms. fluctuated at around 60 percent of GDP. Because of the crisis, however, this number fell to 52 percent in 2008 and is estimated to Summing up, the private sector is at center-stage of the Mauritian have declined further to 46 percent in 2009. The United Kingdom, who resilience, mostly as a result of the bold Government policy actions has been particularly hard-hit in the global downturn and is a major taken in the past three years. market for Mauritius textile exports, represented grave uncertainty to the sector. Short-Run Measures Tourism, textile manufacturing and construction represented close to The Government announced a package in December of 2008 followed 20 percent of total GDP and 30 percent of total employment in by further measures in May of 2009 to counter the impact of the 2007.On that same year, sectoral growth rates were quite buoyant at Global Crisis. Together they shaped a comprehensive 18-month action 14, 8.5, and 15.2 percent, respectively. Such key dynamic sectors plan to ride out the difficult times. As part of the measures, slowed down in 2008 to 2.7, 0, and 11.1 percent, respectively. In 2009 macroeconomic policies were quickly re-oriented to reflect the new a further marked decline is projected to have taken place: -6.4 percent balance of risks. Moreover, coordination between monetary and fiscal (Tourism), -4.0 percent (Textiles) and 3 percent (Construction). policies was well calibrated as recognized in a recent IMF Article IV (January 2010). The floating exchange rate regime also played an Yet, overall economic performance in 2009 did not collapse. GDP important role as a shock absorber, contributing directly to the Balance growth slowed to 5 and 2.8 percent in 2008 and 2009, respectively. of Payments sustainability. Unemployment rate is expected to increase from 7.2 percent in 2008 to 8.1 percent in 2009. Private investment for 2009 is expected to fall by The fiscal response focused on accelerating infrastructure investment 2.2% while FDI for the first nine months of 2009 compared to the projects crucial for long-run economic growth by tackling same period last year declined by 13%. Despite deterioration, both implementation bottlenecks. It also included targeted and temporary output and employment defied the somber outlook from the end of social policies to preserve jobs and protect the most vulnerable. To that 2008. For 2010, there is an expectation of recovery and the IMF end, a number of microeconomic interventions at the level of firms, predicts growth at around 4 percent. Hence, a bit more than one year sectors and workers were put in place.8 later, despite lingering uncertainty, the outlook for the country has improved substantially. What is behind the impressive resilience? The Government also worked with Development Partners to secure scaled-up budget support assistance, which may be particularly useful Reforms for Long-Run Growth Paid Off in the case of further turbulences as the world recovery takes shape. The implementation of the reform agenda since 2006 is at the core of Maintaining Strategic Focus During the Fire the Mauritius’ resilience during 2009. It reinforced economic diversification which helped to sustain overall economic activity as Staying the course and preserving the achievements over the recent more traditional sectors faltered. In particular, the sectors of (i) past was perhaps the most important element of the Mauritius Transport, Storage & Communications, (ii) Financial Intermediation, response. The challenge now is to unwind the short-run measures at an and (iii) Real Estate, Renting & Business Activities kept good growth appropriate pace, resuming fiscal consolidation efforts and maintain momentum and avoided an economy-wide severe downturn. the reform momentum. 8 A salient initiative was the Mechanism for Transitional Support to Private Sector (MTSP, which came to be known as the “Mauritius Approach”). In the MTSP, the Government became an equity partner to guarantee survival of, otherwise sound firms, facing severe distress during the crisis. The Mauritius approach started to be implemented in December 2008. The program initially targeted large companies and the main objective was to reduce the likelihood of massive lay-offs. The Mauritius Approach has saved many jobs directly (3000 jobs among 7 large firms) as of December 2009. Its total cost has been less than 0.1 percent of GDP. 8 Looking Forward 15. Despite successful implementation of reforms, progress in some important areas has been sluggish and additional efforts are needed. For example, under the theme of efficiency in the public sector, restructuring of public enterprises has witnessed only initial reforms and weak momentum, as sufficient political traction has not been generated to follow up with fundamental changes needed. In particular, prevailing arrangements still insulate public enterprises from the more efficiency-oriented mindset being promoted across the central government. Also under the theme of efficiency in the public sector, progress on Performance Management Systems (PMS) has been sluggish. The Government has initially adopted a bottom-up strategy to carry out PMS reforms whereby sensitization exercises were conducted as a first step to familiarize staff with the new tool for performance assessment. While this has been positive, some crucial steps still remain to be taken. For example: (i) subject high-level officials in line ministries to performance criteria as well and (ii) link PMS and PBB exercises. Effective implementation of a PMS system is an important component of civil sector reform and (as in the case of parastatals) it requires both the strategic use of political capital and a high level of internal consensus. Additionally, further reforms are needed to lower telecom charges more significantly and improve trade related infrastructures (airport and port). Discussing these challenges is outside the scope of this report, but it is important to point them out as areas that the government has initially envisaged to be able to accomplish more. 16. Outward-looking and market-oriented strategies continue to be the way forward for Mauritius. The 2008 Global Crisis re-energized a worldwide debate about the benefits of global integration to economic growth and poverty reduction. As argued by a Post-Crisis report from the Commission on Growth and Development (October 2009), financial failures in advanced economies should not be taken to imply a failure of market oriented systems and outward-looking strategies. In the case of Mauritius this is even more true. Being a small island state remotely located from main markets, Mauritius cannot sustain growth without integration to the world economy and consolidating itself as a trade gateway of high-value added activities. Additionally, being a middle-income country, Mauritius will increasingly need to rely on private sector discovery as a source of growth, facilitating technology absorption and “learning-by-competing” in international markets. Nonetheless, it is important to bear in mind that the world may be entering into a phase were its growth potential is lower. More costly capital and strapped consumers in the developed world (in particular the USA), combined to emerging protectionism in large economies, may imply that outward-looking strategies could be less effective than before in generating wealth. 17. Though vulnerability to the world economy continues to be a factor, Mauritius is well positioned in the aftermath of the global crisis. Domestic economic rebound in 2010 and 2011 will remain highly dependent on how global demand and private capital flows will evolve. The nascent world recovery is still filled with uncertainties and further turbulences can bring substantial challenges to Mauritius. Nonetheless, the country has emerged from the global crisis in a position of strength. Firstly, a more diversified economy has proven its potential to withstand strong negative shocks and, in particular, to avoid costly macroeconomic disarray. Secondly, many pro-active policies announced to mitigate the immediate impact of the crisis did not need to be fully used, and now can be readily redeployed in the 9 event of a more sluggish than anticipated rebound.9 Thirdly, Mauritius has kept its reform focus throughout the crisis and sustained on-going key initiatives for long-run growth such as (i) ambitious infrastructure programs to improve connectivity with world markets, (ii) modernization of the public sector to improve service delivery and efficiency, and (iii) measures to promote competitiveness, investment climate, and skills development in the labor force. 18. Promoting robust productivity growth is a fundamental challenge for the Mauritian economy. It is at the heart of economic transformation towards a higher valued economy which will sustain growth and development in the country. This report focuses on two crucial instruments to raise productivity in Mauritius: (a) trade policy and (b) labor policy. These two policies are the most important channels for technology and skill transfers and, so, the upgrading of the workforce and firms operating in Mauritius. 19. Trade policy: Mauritius has made significant progress in opening its economy through tariff reductions over since the mid 1980s, picking up efforts again after 2006. Now Mauritius needs to continue to deepen trade liberalization through second-generation reforms that aim at reducing the cost of operating for exporters, and stimulate spillovers from exporting to domestic firms. These are essential requirements for becoming a dynamic global competitor and improve export performance, which continues to be concentrated (textiles and tourism) and stagnant among goods (Figure 6). Fast growing and diversifying exports would also help to reduce the country’s structural external vulnerability (Figure 7) and help minimize the likelihood of macroeconomic instability as a result of exogenous shocks. Perhaps more importantly, the elimination of distortions in the trade environment would favor the optimal allocation of resources, most notably the entry and expansion of SMEs and start-ups that are not well equipped to handle costly procedures and/or disputing regulations. Chapter 2 will discuss much needed improvements in the trade regulatory environment of Mauritius and propose concrete actions. 20. Labor Policy: Since 2006, the labor market has performed well. Job losses associated with the changing structure of the economy have stabilized and young workers (particularly women) found jobs at a strong pace in the service sector. Additionally, notwithstanding the impact of the crisis, male unemployment rates have remained nearly frictional at around 4.5 percent in 2009 while female unemployment rate has deteriorated mildly to 13.3 percent (from 12.7 percent in 2008). Despite these positive developments, labor remains a key growth constraint and a potential social destabilizing factor in Mauritius. Firstly, the country faces the challenge of absorbing unskilled and semi-skilled workers as it transforms into a more services oriented economy. Secondly, some labor-intensive sectors (textile and construction) are already importing foreign unskilled workers to remain competitive since many Mauritians will not necessarily accept some types of jobs. Thirdly, job opportunities in higher-valued added industries and/or managerial occupations have outpaced growth in the supply of qualified workers, limiting the expansion of the emerging service economy in particular – skills shortages and mismatches are fundamental bottlenecks to greater competitiveness and economic transformation to higher value added. Such challenges are unfolding against a backdrop of low population growth and important challenges to the education sector. All of the above contributes to deepening labor market mismatches and 9 This mainly includes (i) an expansionary fiscal policy to the tune of 5 percent of GDP between July 2009 and December 2010 which has not been fully implemented (part of the stimulus is deliberately being held contingent) and (ii) significant external financing secured with multilaterals that has not been disbursed and it is also being held contingently. 10 an overall shortage of labor in the economy – see box 3. Chapter 3 will review labor market performance in Mauritius post-2006 with a view to understand its adaptability to economic transformations. It will also propose policy recommendations to address challenges at the high and low end of the skill spectrum in the labor market. Figure 6 Figure 7 Exports (1992 Constant Value) External Vulnerabilities 60000 10 50000 5 40000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 % 30000 -5 20000 -10 10000 -15 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Current Account % GDP Overall Balance of Payment % GDP Total Exports Goods Exports Services Exports Trade Balance (Goods and Services) % GDP Source: World Bank and CSO 21. Looking forward, as Mauritius continues in its reform program, maintaining the proper balance and synergies between implementation of trade and labor markets policies is critical for two reasons: (a) There is a need to find a balance between the competitiveness and social agendas, which is needed for political traction in support of continued reforms. There is currently in Mauritius a perception that the “growth agenda” has moved very satisfactorily, while the “social agenda” is lagging. Polarization between these two agendas is undesirable and they should ideally reinforce each other in a dynamic perspective. A growing economy is required to accumulate wealth, while an effective redistribution policy is needed to help some households move out of poverty.10 This virtuous circle has been central to Mauritius success and should be preserved through trade and labor policies that will reinforce the credibility and buy- in of reforms over time. (b) Trade and labor policies work together in promoting productivity-enhancing reallocation of resources and gains. Trade liberalization in Mauritius is not new. It can be traced back to 1983, with important milestones in 1994, 2001 and 2006. Overtime, trade liberalization has played a key role in fostering investment as discussed in this chapter, but with very limited impact on aggregate TFP. In what regards labor productivity, despite recent growth11, a comparison of PPP-adjusted value-added per worker across selected countries shows that Mauritius is lagging behind: Singapore is six times more productive in Industry and three times more productive in Services; South Africa is 76 percent more productive in Industry and 11 percent more productive in services. 12 The ability of workers and firms to adapt and increase their productivity depends on 10 For more argument on this virtuous circle, see Perry et al. Poverty Reduction and Growth: Virtuous and Vicious Circles, 2006 11 The Mauritius ICA 2009 confirms that labor productivity among manufacturing firms has increased between 2005 and 2008. 12 Figures calculated using World Bank Development Indicators (WDI) dataset. Additional statistics on labor productivity gains across countries can be found in Berthelemey (2001). 11 different factors including labor policies, which will in turn determine the ideal pace and depth in opening up the economy. This feedback mechanism between trade and labor policies is particularly important in Mauritius. Box 3: Labor Market Shortage A back –of-the-envelope calculation can illustrate very clearly the escalating labor market shortage in Mauritius. Consider the following simplifying assumptions: (i) output in each sector listed below grows over the next 7 years by the same amount that it did in the previous 7 and (ii) sectoral output employment elasticities – crudely calculated as percentage variation of employment over output - remains unchanged during the same period. Under this scenario, total employment in 2014 would be approximately 588 thousand. This would represent a 12% increase in employment over 7 years, or a yearly average of 1.6% growth. Based on demographics, this would be fairly difficult to achieve. Looking further ahead (beyond 2014), the United Nations projects that the working age population (15-64) in Mauritius will peak in 2015 at 70.4%. In the subsequent generation (30 years), the proportion of working age population in Mauritius should fall to levels close to the mid-1980s (lows 60%). Employment by Industry (2007) – Thousands People and % in Parenthesis 2007 2000 Industry Group Male Female Total Total Agriculture 35.2 10.1% 12.1 6.9% 47.3 9% 59 12.1% Sugarcane 15 4.3% 2.8 1.6% 17.8 3.4% 29.4 6.1% Non Sugarcane 20.2 5.8% 9.3 5.3% 29.5 5.6% 29.6 6.1% Mining and quarrying 0.2 0.1% 0 0% 0.2 0% 1.3 0.3% Manufacturing 68.4 19.7% 54.1 30.6% 122.5 23.4% 139.2 28.6% Sugar 2.0 0.6% 0 0% 2.0 0% 3.3 0.7% Textiles 27.4 7.9% 38.2 21.6% 65.6 12.5% 89.8 18.5% Food 6.9 2% 5.0 2.8% 11.9 2.3% Other 32.1 9.2% 10.9 6.2% 43.0 8.2% 46.1 9.5% Electricity, gas and water 2.8 0.8% 0.2 0.1% 3.0 0.6% 3.0 0.6% Construction 48.9 14.1% 0.8 0.5% 49.7 9.5% 45.1 9.3% Wholesale & retail trade; 50.1 14.4% 28.3 16% 78.4 15% 62.8 12.9% repair of motor vehicles, motorcycles, personal and households goods Hotels and restaurants 22.6 6.5% 9.5 5.4% 32.1 6.1% 23.6 4.9% Transport, storage and 32.7 9.4% 4.7 2.7% 37.4 7.1% 31.5 6.5% communications Financial intermediation 5.8 1.7% 4.8 2.7% 10.6 2% 7.2 1.5% Real estate, renting and 15.5 4.5% 9.2 5.2% 24.7 4.7% 14.6 3% business activities Public administration and 30.3 8.7% 8.8 5% 39.1 7.5% 35.1 7.2% defense; compulsory social security Education 12.9 3.7% 15.9 9% 28.8 5.5% 22.0 4.5% Health and social work 7.9 2.3% 7.7 4.4% 15.6 3% 13.3 2.7% Other services 13.8 0.4% 20.5 11.6% 34.3 6.5% 28.2 5.8% Total 347.1 100% 176.6 100% 523.7 100% 485.9 100% Source: CSO 22. Reforms to the trade regulatory environment also offer an opportunity for Mauritius to advance its regional integration agenda. Over the last decade there has been important re-balancing of economic forces across the world. Developing nations have increased their participation in overall GDP and global trade, and south-south opportunities are emerging. As the world emerges from the current downturn, the role of powerhouses like China and India with whom Mauritius enjoys growing ties will continue to increase. Economic activities in the African continent will also pick-up as commodity prices, investment flows and purchasing power increase. Currently, Mauritius exports of goods are still highly concentrated in Europe - UK and France together account for almost 50 percent of total exports and 12 Europe as a whole for almost 70 percent. Big markets like China, India and Australia represent less than one percent of total Mauritian exports. South Africa corresponds to less than 5 percent and trade flows with other African countries remain marginal - with the exception of exports to Madagascar and Reunion. 23. Within Africa, Mauritius needs a pragmatic integration approach that pursues strategic interests in regional bodies, and bilaterally when necessary, that goes beyond expansion of trade flows. Leadership in tackling distortions of the trade regulatory environment can play a catalytic role in the region, and provide a platform for policy coordination which will strengthen the underlying regional framework for trade and investment. There is strong interest among COMESA and SADC states to deal with NTMs and Mauritius has started a pilot initiative with the World Bank and other cooperating agencies (UNCTAD, WTO) to launch a major data collection exercise on NTMs. This exercise is being carried out in 15 countries worldwide (6 in Africa) and will allow a more systematic analysis of the effects that NTMs can produce on trade and competitiveness. Mauritius should use the information gathered as one element of broader strategy to promote dialogue and find policy solutions with partners. 24. Mauritius has entered a second generation reform environment. In the first three years after 2006, the Ministry of Finance resolutely pursued reforms in areas under its direct control or immediate zone of influence, accepting ex ante the short-term political costs that could follow (examples include trade tariff reductions, fiscal policy, reforming some aspects of the business regulatory environment). Underlying such strategy, there was a strong self-confidence on the growth-supporting impact of policy actions being adopted. Eventually, reforms paid off and the Ministry of Finance boosted its credibility. This focused approach is simply not available in many important issues now. The political economy of further reforms in trade and labor is such that a much higher level of internal consensus must be built ex ante. The reform dynamics then become crucially dependent on how well different stakeholders exercise intellectual persuasion and/or on the political capital they are able to mobilize at higher decision-making instances. This increases the importance of sound analytical work underpinning policy recommendations and the need to disseminate/use it effectively for concrete results. 25. Retaining the focus of reforms will require buy-in across Government and society, which can be assisted by efficient communications. The foundations for long-run growth have been laid down. In particular, the structure of incentives for private sector operators has been revamped to favor efficiency and competitiveness at the firm-level. However, this will necessarily imply adjustments (i.e., creative destruction) as firms and workers will enter and exit the marketplace. Medium/long-run traction for this approach must be secured almost on a day-by-day basis. This implies that as Mauritius progresses, policies should also aim to minimize social costs by facilitating adjustments while at the same time interventions and their impacts are effectively explained to internal and external audiences. Trade and labor policies are essential ingredients in this process and the present report seeks to inform policymaking on both. 13 The Trade Regulatory Framework for a Dynamic Global Competitor: The Case for Reform in Mauritius Mr. Reza is a Small Mauritian Exporter… 26. Mr. Reza is a small Mauritian exporter who wanted to export a seafood product in small quantities to Australia. Authorities wanted to apply rigorous European Union (EU) level standards to his products. Yet, these standards are unnecessary for exports to Australia and would cost Mr. Reza around 1/3 of the total consignment value in direct fees. Eventually, the issue was solved by the intervention of another branch of government which also had the right to issue permits, but the problem was addressed in ad hoc and costly fashion. 27. Many exporters in Mauritius, like Mr. Reza, have to face a series of administrative and regulatory obstacles that raise the cost of doing business and reduce their competitiveness on international markets. Those obstacles are believed to be one of the elements that explain the mixed performance of Mauritius in terms of export growth and diversification, especially in comparison to East Asian tigers – Figures 8 and 9. Figure 8 Figure 9 Export of Goods and Services as Share of GDP Mauritius Export Profile 2008 300 100% 90% Other 250 80% Other Other Distribution in 2008 70% Services USA 200 60% Other Europe 50% Sugar 150 % 40% France 30% Tourism 100 Goods 20% Apparel UK 10% 50 0% Goods Exports Goods Exports Total Exports Service Exports 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Mauritius Estonia Ireland Malta Hong Kong, China Singapore Source: CSO, Bank of Mauritius, World Bank, Staff Calculation The Iceberg of Trade Policy: From Top to Bottom 28. Export competitiveness depends on several factors, which often are classified as “hard” and “soft” constraints. Among hard constraints are, for example, the needs to develop connectivity through transport and communication infrastructure. Skill labor is also a hard constraint since it takes time to educate workers. Concurrently, soft constraints are typically found in the policy and regulatory environment. In particular, the economic literature has shown that protectionist policies can be especially distortionary, impacting firms’ competitiveness and the allocation of resources within the economy. High tariff and non tariff barriers increase protection and prevent local firms to adjust to international competition. They also 14 reduce access to imported inputs, know-how and technology, and final goods, raising production costs and negatively affecting consumer welfare in the domestic economy. 29. Past trade regulatory reforms focused on reducing tariffs and visible non tariff barriers, but Mauritius still has a way to go as a dynamic exporter. The Government has a very good record in removing tariffs as it went from high to low averages, with a marked acceleration since 2006. Indeed, Mauritius ranks 13th in trade policy and 17th on the ease of Doing Business Ranking (see table 2). Yet, trade outcome as measured by real growth in total trade displays a weak performance. Figure 8 also indicates that exports as percentage of GDP is locked at an unimpressive plateau over the last years. Table 2: Trade Policy Performance Indicator External Institutional Trade Category Trade Policy Environment Environment Trade Facilitation Outcome MA-TTRI TTRI (MFN (applied tariff Ease of Doing Real growth applied tariff) incl. prefs.) - Business - in total trade Country - All Goods All Goods Rank LPI – Overall (g+s,%) Year 2006-09 Latest 2006-09 Latest 2006-09 Latest 2006-09 Latest 2006-09 Latest Hong Kong, China 1 78 3 13 144 Singapore 1 54 1 2 130 Switzerland 3 43 21 6 139 Papua New Guinea 4 6 102 126 82 Turkey 5 53 73 39 156 Israel 6 17 29 31 134 Kazakhstan 7 24 63 63 121 Norway 8 40 10 10 77 United States 9 73 4 15 143 Iceland 10 28 14 41 140 Moldova 11 27 94 104 98 United Arab Emir. 12 71 33 24 .. Mauritius 13 15 17 83 82 Australia 14 115 9 17 41 Kyrgyz Republic 15 64 41 93 95 Costa Rica 16 45 121 56 64 New Zealand 17 112 2 21 88 Canada 18 44 8 14 147 Saudi Arabia 19 42 13 39 90 Taiwan, China 20 69 46 20 157 Philippines 21 56 144 44 138 Croatia 22 66 103 72 59 Brunei 23 21 96 .. 63 Malaysia 24 55 23 29 148 Austria 25 82 28 19 127 Source: World Bank 30. Regulatory cost affecting trade is the part of the iceberg underneath the waterline. As countries progress along the path of development they typically move from high to low tariff policies. At the same time, the quality of regulations and their implementation come to play an increasingly important role in determining economic efficiency and trade outcomes. On the one hand, this reflects the increasing sophistication of higher income economies in which new business opportunities are less predictable and depend on entrepreneurial drive of small and medium firms. On the other hand, high tariffs may have 15 hidden inappropriate regulations and weak capacity towards implementation, which become more binding in a low-tariff environment.13 31. Inappropriate regulations and weak implementation are compromising competitiveness in Mauritius today. Consultations with stakeholders in the private sector left no doubt that regulatory costs matters and that they are affecting performance of the local firms. In addition to Mr. Reza’s case of seafood export, the examples below offer further evidence. Example 1 – Ineffective approach in designing regulations: Problem: The government has defined the public policy objective of shielding citizens from toxic chemicals. The relevant regulation, the Dangerous Drug Act, bans the importation of a defined list of toxic chemicals. While it is straightforward to prevent the importation of these materials in bulk form, there is no regulation to inspect and test imports of final products containing the toxic ingredients, such as paints. Final imported products using these toxic chemicals do not form part of the list of products to be controlled in the Consumer Protection Act. Such an approach of imposing regulations on inputs is ineffective. A harmonized approach of regulating the final product, whether produced domestically or imported, based on sample tests, could be more effective. Impact: While Mauritian firms can no longer use the toxic chemicals, products containing toxic chemicals are still being sold on the domestic market. According to the Mauritius Paint Association, the production cost of paint produced in Mauritius has increased since the non-toxic ingredients that must now be used are more expensive. Thus Mauritian producers of paint find it more difficult to compete in the domestic market with imported paints that contain the toxic materials. They also are at a competitive disadvantage in export markets that have not banned such ingredients. Example 2 – Application of plant health regulations creates obstacles to flower exporters: Problem: Mauritius was a global market leader in traditional (red) anthurium flowers. International competitors have developed new species with various colors as a marketing tool. Local producers would like to respond by growing a wider range of varieties. There is a risk of bacterial infection from imported plants that could spread to domestic production. In response, the government has banned the import of adult plants regardless of the risk that the particular imports may contain the bacteria. The government currently does not accept certificates confirming that plants, in general, are disease free from foreign laboratories. This forces exporters to import only baby plants (which do not contain the bacteria) which take up to two years to grow and be sold on the market. Impact: The import ban of adult plants prevents exporters from following market trends. Mauritius has been marginalized as an exporter of only a few varieties, as it takes time and involves massive investment in developing new varieties. Small and medium producers do not have the financial capacity to invest in such technologies and returns from such investment is lesser compared to importing adult plants of different varieties. A more flexible and risk-based approach to the implementation of plant health 13 One economist has likened the process of tariff reduction to that of draining a swamp with the tariff akin to the water level. It is only as the tariff falls that a range of snags and constraints become apparent. 16 regulations would be less restrictive on the competitiveness of exporters. The government could consider less trade-distorting policies such as accepting accredited certification from disease-free foreign suppliers and/or introduce regulations to make use of the expertise of credible local laboratories to conduct tests and advise. Example 3 – Import permits in the seafood sector: Problem: Firms in the seafood sector are often required to secure import permits from both the Ministries of Fisheries and the Ministry of Commerce. In addition a landing permit is also required. These permits all seem redundant. Only information on quantity, price and species is required at different instances for issuing the permits and customs would have this information already. Impact: Large firms can afford dedicated people to deal with the paperwork and has the weight to engage in discussion if issues emerge. This is not true for small or newly established companies. Example 4 – Pesticide residue testing: Problem: Pesticide residue testing is an essential business service and the basis for sound food safety policy. Four public laboratories undertake residue testing: Ministry of Agro-Industry, Ministry of Health, Sugar laboratory and Mauritius Bureau of Standards. Impact: Inefficiency. The strong economies of scale in testing make it very expensive and inefficient to split the scarce laboratory resources across four facilities. This leads to duplication of efforts and a low level of services. Example 5 – A New fresh fish exporter: Problem: Fresh fish is a high value but highly perishable product. Opening hours of airport inspections prevent Mauritius fresh fish exports in reaching EU markets on a Monday. Only 3 people may sign paperwork. If unavailable, the exporter risks expensive delays. Additionally, no laboratory on Mauritius can do the necessary testing. The exporter uses costly EU laboratories. Impact: The lack of accreditation of laboratory services is a burden to the business. Also, a higher degree of business orientation is needed in providing inspection services to this exporter. Example 6 – Producer of alcoholic spirits: Problem: For a period of two years, a domestic producer of alcoholic spirits has worked on a branding strategy for its Mauritius rum. The producer participated in international events and received awards for its product. Then a sudden ban on promotion of alcohol came into effect in Mauritius. Foreign brands continue to be promoted in Magazines and TV catering for tourists, but promotion of local brands is made more difficult. 17 Impact: Penetration in the domestic market is difficult and market share lower than necessary. Is the ban the most effective way to achieve the objective of limiting domestic consumption of alcohol? Example 7 – Quota and unnecessary regulations on imports of vegetables: Problem: The government has defined the public policy objective of protecting local producers of vegetables. Imports of fresh exotic and selected vegetables are only permissible during periods of either shortage on the domestic market or when quality is not to desired standards for a targeted category of customers. To ensure that the imported products are not sold on the domestic regular market, for example, a supplier of fresh vegetables to the hotels in Mauritius was authorized to import selected vegetables, but only by air freight exclusively – although facilities exists to imports such vegetables on well equipped reefers. Impact: This policy on mode of transport for imports adds to the total cost and the quotas are limiting access of all customers to a better variety of products. Box 4: Use of Standards Standards to protect human, plant and animal health are necessary, but it is important to avoid its use as regulatory trade barriers. Sanitary and Phytosanitary measures (a subset of technical regulations and standards) play an important role in protecting health and safety of citizens. Nonetheless, consultations held with stakeholders indicated that there is emerging pressure for using them as regulatory barriers on trade. It is important to ensure discipline in the use of rules and regulations to prevent an increase in within-border protection to compensate for tariff reductions. Policy solutions to the standard issue should maintain Mauritius on the path to competitiveness. The uneven playing field between domestic producers and imported goods (illustrated in Example 1 above) makes a good case for further rationalization of standards, rather than their expansion. The latter would effectively isolate Mauritian industry from the world market, ultimately hurting the export sector through more expensive inputs and, consequently, lower competitiveness. Moreover, isolation through standards is even more costly than through tariffs since standards are less transparent and provide no direct revenue. Additionally, issues of WTO compatibility are likely to occur if standards are widely used for protection. Trading partners may also retaliate, and it would be risky (at best) for Mauritius to engage in a standards-based trade war with emerging powerhouses. Finally, misused standards may generate rents to enforcement agencies with no public benefit, compounding negative impact on competitiveness through corruption. A well-functioning standard system is essential to competitiveness, and it is important not to allow its use as a compensating instrument for tariff reductions. If properly designed and implemented, standards lower the costs of finding the right qualities and improve access to inputs. International best practice suggests that standards should be used for health, safety and environment risks. Quality issues should be regulated by voluntary standards with the Government playing a role in consumer awareness when necessary.14 By nature, standards are a highly technical topic which is often confined to specialists in relevant line-ministries. Nonetheless, policymakers should not become hostage of that discussion. While the technical dimension is unavoidable, a systemic view of the overall standard services being provided is essential and currently missing in Mauritius. 32. These examples illustrate the main weaknesses in the trade regulatory environment of Mauritius that can be summarized as follows: Lack of systematic approach to assess the cost-benefit of regulations and their implementation. There is no clear procedure by which actual and proposed regulations are examined and analyzed in terms of whether their design is consistent with the underlying public policy objective and 14 There are certainly developed countries making use of standards as a tool for protection, but Mauritius should consider its own situation on this matter – namely, the importance of becoming a dynamic global competitive player and the coherent set of policy steps required to achieve this goal. 18 account for the existing capacity in line ministries and agencies and in the private sector to effectively implement. Lack of competitiveness perspective in many ministries and agencies. Few ministries or agencies consider the impact of regulations and their implementation on the competitiveness of the country. In many instances, regulations are viewed as an instrument to exert power by the administration rather than serve customers. Excessive reliance on ex ante inspections rather than random and targeted ex post controls. With the exception of customs, most line ministries and agencies take a very rigid approach to the implementation of regulations, leading to inefficient use of their limited resources and to delays. Best practices suggest that controls should target risky transactions, generally through ex post audit or controls. Hence, for example, firms and individuals that have invested in processes and procedures that reduce risks face similar compliance costs to those who products or activities pose a greater risk. These high compliance costs and lack of flexibility inhibits international competitiveness relative to countries where the regulatory system and its application encourages rather than stifles innovation. No recourse to dispute procedures. Individuals and firms have no formal mechanism by which to challenge the decisions of civil servants as they implement regulations. In practice, large firms and well connected individuals are able to exert influence and obtain a review of decisions that they deem to be incorrect or inappropriate. By contrast, small and new firms and ordinary individuals are generally unable to dispute decisions. Duplication of requirements across government ministries and agencies. In many cases different parts of the government are making similar requirements, such as permits or licenses or the testing of products, to achieve the same objective. For example, the export of fish requires permits from the Ministry of Fisheries and the Ministry of Agriculture to achieve essentially the same purpose of monitoring and collecting information – information that is already recorded by Customs and is readily available from them. Lack of coordination and cooperation across ministries and agencies. While different elements of the Government have responsibility for achieving the same public policy objective, the efficiency with which this objective is achieved is often undermined by lack of coordination and cooperation. Interested stakeholders, even within the Government, do not always feel properly consulted. 33. Regulatory costs have a direct impact on trade-related measures of performance. Mauritius is lagging behind on time necessary for dealing with exports and imports. As indicated in Figure 10, top performers such as Hong Kong, Singapore and Estonia use half as many days as Mauritius. Other good performers are also ahead. Regarding imports in particular, coordination among multiple agencies issuing permits/clearances is a key issue. As of January 2009, approximately 30 percent of import declarations had two requirements involving different line ministries and agencies. In approximately 5 percent of the cases, 19 three or four import requirements were needed.15 Additionally, a large number of transactions (64 percent of imports by sea) go through the yellow channel (medium-risk imports) which demands a more thorough check on compliance. Because there is a lack of coordination and competitiveness perspective among the line ministries empowered to issue licenses/clearances, time to export and import end up reflecting deficiencies in the regulatory environment. The issue goes much beyond customs, which in Mauritius functions fairly efficiently. Figure 10 Time to Export and Import 14 12 Number of Days 10 8 6 4 Days to Export Days to Import 2 0 Source: Doing Business (2010) 34. Another index that helps capture distortions from the trade regulatory environment is the Logistic Performance Indicator (LPI). As indicated in table 2, Mauritius has an unimpressive position in the LPI world ranking. Furthermore, it is relatively far away from the top performers and countries with similar income for almost all dimensions of the LPI index (Figures 11 and 12). Except for the international shipment dimension (which measures the ease of arranging competitively priced shipments), all other components of the aggregate LPI have a lackluster performance in Mauritius. Although admittedly hard constraints in the form of physical infrastructure possibly play an important role in explaining the low position in the ranking, the LPI also captures elements such as (i) efficiency of clearance processes by border control agencies, and (ii) quality of logistic services (transport operators, customs brokers). Those two elements are potentially hurt by the inefficient regulations affecting exporters and importers in the country. 35. Finally, the KOF16 index of globalization also offers evidence that hidden import barriers are worse in Mauritius than in others strong performing open economies.17 Its second sub-component 15 For the cases of 3 requirements, the instances involved were Fishery Authority; Food and Drug Permit; Import Permit/Supplies Con Act. For the cases of 4 requirements, the instances involved were Agriculture Market Board Permit; MOA phytosanitary certificate; Food and Drugs permit; Import Permit/Supplies Con Act 16 KOF is an abbreviation for “Konjunkturforschungsstelle”, a Swiss Economic Institute. 17 The KOF index has three different dimensions: (i) economic globalization, (ii) political globalization and (iii) social globalization. The first dimension has two sub-components. The first one measures actual flows (trade, FDI, portfolio investment). 20 , which we use in the figure below, basically captures three types of restrictions in the policy environment that could impede economic globalization: (i) mean tariff rate and taxes on international trade as percentage of GDP; (ii) hidden import barriers (measured from survey questions used to produce the Global Competitiveness Report); and (iii) capital account restrictions. Figure 13 captures the improvement on tariffs between 2005 and 2007, but also indicates that other components (hidden import barriers included) are keeping the economic globalization index in Mauritius below that of competitors. Figure 11 Figure 12 4.5 Logistics Performance Indicator 2010 Logistic Performance Indicator Components (2010) 4 3.5 3 Customs LPI Index 2.5 4.5 4 2 3.5 1.5 3 2.5 1 Timeliness 2 Infrastructure 0.5 1.5 Singapore 0 1 0.5 Ireland Chile Malta Mauritius Ireland Hong Kong, China Estonia Singapore 0 Lower middle income Upper middle income Chile Mauritius International Tracking & tracing shipments Logistics competence Source: World Bank Figure 13 120 Economic Globalization (2007) Restriction KOF Economic Globalization 100 Restriction Index 80 60 2005 40 20 0 Chile Malta Mauritius Ireland Estonia Singapore Source: World Bank Why moving? 36. First and foremost, as evidenced by the benchmarking analysis in the previous section, Mauritius is clearly lagging behind when compared to competitors. Consultations with the private sector confirm that there is ample scope for improving the regulatory environment affecting trade in Mauritius. Addressing the gap is a natural continuation of the openness and outward-looking strategy the 21 country has pursued since the mid-80s. Overtime, Mauritius has been on the vanguard of growth reforms and remaining ahead of the curve will be necessary to support a dynamic and internationally competitive economy. This leads to a second-generation trade reform that goes beyond tariff reductions and catches up with international good practices of the regulatory trade environment. 37. Regulatory costs affecting trade create an anti-export bias. To be successful, outward-looking growth strategies need to support a low cost structure for exporters. In the past, the EPZs played this role as the government targeted fiscal incentives to sectors benefiting from the trade preferences. This was used to compensate for a wide variety of visible and invisible factors negatively impacting exporter costs. With the phasing-out of trade preferences, the Government also has dismantled the EPZ sector. The objective now is to provide an overall policy framework conducive to private sector development, so that a broader range of economic activities become organically competitive. When it comes to regulatory costs, the exporters are proportionally more affected by them than firms producing for the local market. The reason is simple: they cannot transmit those costs to consumers because of fierce competition in international markets. Hence, regulations affecting trade create an anti-export bias that is particularly harmful in this new era of global integration for Mauritius. 38. Regulatory costs disproportionally affect SMEs, emerging economic activities and job creation. SMEs and start-ups in emerging sector are by construction less capable to handle costly regulations. Often they simply do not have the necessary scale (resources and leverage) to cover the fixed costs associated with compliance. As a result, SMEs face an increased likelihood of sub-optimal growth or early death when hit by shocks. When compounded by the anti-export bias mentioned above, costly regulations stifle the development of a fundamental growth engine for middle income economies like Mauritius: niche discovery, learning and innovation in the private sector. The issue is not only an impediment to entrepreneurship, but also to trickled down growth and social inclusion since employment generation among SMEs has been increasingly important in the economy (see next chapter for more details). 39. Benefits of lowering unnecessary regulatory costs are not marginal for strategic sectors in Mauritius. In sectors such as ICT and textile, very tight profit margins in international markets imply that entrepreneurs are especially sensitive to costs. Small gains in those sectors are likely to make a lot difference in location and expansion decisions, particularly among SMEs. Furthermore, many distortions in the trade regulatory environment affect on-going operations of business and are not one-time hurdles. For instance, cumbersome export and import procedures or high compliance costs have to be dealt recurrently by firms over their lifetime. Even worse, lack of competiveness perspective creates unpredictability as new requirements or regulations may be issued without proper attention to their impact on costs. Finally, according to the OECD, “countries that progress simultaneously with market opening and regulatory reform policies are better placed to take advantage of the benefits of trade liberalization”. 40. Distortions and inefficiencies in the importation of inputs lead to unrealized export capacity. Import and export flows are not independent. Particularly in a small economy that relies on foreign inputs for domestic production, distortions and inefficiencies embedded in import regulations represent a serious threat to export performance. The true costs of regulations are larger than the size of fees charged by individual agencies. They also include waiting time, lost business opportunities, and uncertainty. All of 22 which discourage investment, innovation and market entry. Bottlenecks in the importation of inputs slows down the process of supply chain upgrading by keeping costs high and holding back consumers expectations about quality of goods and services. The impact on export competitiveness is particularly severe as fierce competition in global markets requires participants to deliver low price and high quality. 41. Removing non-Tariff Barriers offer a good platform to advance regional integration initiatives, and consolidate Mauritius leadership. Mauritius is very active in proposing measures to advance regional integration, particularly in the southern Africa region (i.e., COMESA). This is indeed a promising agenda given the benefits to trade and investment flows from improving the regional policy environment. Of course benefits from further integration would accrue to all countries involved, but Mauritius is especially well positioned to do so, in reason of its competitiveness advantage compared to most of his neighbors and the expected gains from cheaper imports. Mauritius has already initiated efforts to collect information on its own non-tariff barriers, as some other countries in the region. Coordinated efforts to further harmonize data collected and to effectively implement actions agreed on bilateral or multilateral basis provide a good concrete opportunity for advancing the regional integration dialogue. There is also strong interest from the international community in pursuing this general theme and Mauritius could play a leadership role by spearheading collaborative work aimed at improving the regional trade regulatory environment.18 42. Weaknesses in the trade regulatory environment manifest themselves as a microeconomic phenomenon, but they altogether produce first order macro impact. Individually, the impact of burdensome regulations is often diffused across the economy as they impact on one firm or a few firms at the time. They become visible when a global assessment is produced such as the one proposed here or when compared to other estimates in emerging or industrialized economies – excessive regulation may account for 10% of GDP in the US.19 The cost of excessive regulation is even more harmful in a dynamic perspective since higher costs for business lead to lower productivity, less investment, and lower adaptability. This in turn contributes to less job creation, lower growth and a decrease in size of private sector while delivering higher prices, declined quality and smaller choice to consumers. In this context, a mindset of Government control inherited from the past must be replaced. In particular, the paradigm must continue to shift towards a Government that exercises parsimonious and judicious oversight of the private sector under a superseding goal: enhancing and sustaining competitiveness. What to do? 43. The challenges discussed above are not unique to Mauritius. To address them, a series of principles has been derived based on international good practices. Box 5 summarizes OECD guiding principles to be used while designing and implementing regulations: 18 A major data collection effort involving UNCTAD, the World Bank and other international agencies is underway to renew the TRAINS NTM (Non-Tariff Measures) database and build capacity worldwide to collect, code and update data on a yearly basis. Mauritius is participating as a pilot country. 19 See Mark Crain (2005). 23 Box 5: The Efficient Regulation Principles at OECD 1. Transparency and openness. All stakeholders (including existing firms, new firms, potential entrants, foreign firms, all government departments concerned and consumers) should have easy access to information about regulations and procedures and be given the opportunity to participate in consultations regarding regulations. In practice excessive discretion by field-level bureaucrats should be avoided and there should be procedures whereby stakeholders can appeal the decisions of bureaucrats. 2. Non-discrimination. There should be equality of competitive opportunities between products and services irrespective of their country of origin. In the parlance of the GATT this requires both national treatment and MFN treatment and applies to rules and regulations that are more onerous for domestic producers than for importers. 3. Avoid unnecessary trade restrictiveness. Governments should use regulations that are not more trade and investment restrictive than necessary to fulfill the legitimate public policy objectives. This requires careful assessment of the impact of regulations so that in neither design nor implementation do they create unjustified difficulties for the free flow of goods, services and investment. 4. Use performance based regulations (rather than design or descriptive characteristics). It is easier and less costly when firms have flexibility to meet requirements as this allows for innovation and improved efficiency. Also, where feasible, consider alternatives to regulation 20 such as financial measures (taxes, subsidies) or other market measures (market institutions, defining property rights). 5. Use regulatory impact analysis (RIA) to assess the need for new regulation and to review the impact of existing regulations. 6. Administrative simplification to minimize the administrative burdens on firms in complying with regulations. Initiatives that can contribute to this objective include: one stop shops; IT driven mechanisms; simplification of license and permit procedures; setting time limits for decision-making. Many of these approaches are being adopted in Mauritius but appear hampered by lack of cooperation between agencies. 7. Use internationally harmonized measures to minimize the burdens on firms to comply with different standards and regulations for products in international trade. National authorities should systematically examine whether a relevant international standard exists when proposing or reviewing a regulation and, if so, whether if it would be appropriate and effective for the regulation. 8. Ensure the quality of conformity assessment procedures. Conformity assessment procedures can facilitate trade by increasing consumer confidence if done without excessive time and cost. But conformity assessment procedures can raise barriers when there is a duplication of costs in different markets for essentially identical tests against the same or equivalent standards. Options include mutual recognition agreements, recognition of supplier’s declaration of conformity, unilateral recognition of conformity assessment results from other countries, voluntary agreements between conformity assessment bodies in different countries. 9. Incorporate competition principles into regulatory practices. Increasing competition should be recognized as a goal of regulatory reform such that there should be mechanisms to identify anticompetitive practices and to address complaints from consumers and new or potential firm entrants 44. Easier said than done: implementing such principles is not a simple task. The existing trade regulatory environment and its supporting political institutions have been shaped by active trade policies over the last 4 decades in Mauritius. During most of this period, economy-wide competitiveness concerns have never been a priority since the EPZs directly addressed weaknesses through subsidies or special regulations targeting selected exporting firms. This allowed for a different use of the discretionary regulatory power assigned to line ministries and departments. It effectively became a mechanism for accommodating different interests within winning political coalitions. Hence, the fragmentation of the regulatory landscape today plays an important role in the distribution of power amongst political players and it has been historically constructed. An entrenched silo mentality has developed across line ministries in detriment to an economy-wide competitiveness perspective. Government stakeholders tend to be very protective of their mandates and reluctant to relinquish power for the common goal of competitiveness. Addressing the issue requires an effective strategy to deal with the associated political economy legacy of EPZs and trade policies. 45. Recent setbacks force to think beyond the box. The Mauritian Government has not been inactive over the past few years, and attempts to streamline the regulatory environment were launched with limited results. In the 2008/09 budget, the Government of Mauritius announced its intention to 20 A typical RIA will include: purpose and nature of the regulation; the consultation process; review of options for solving the problem; benefits and costs of the regulation; compliance, enforcement and monitoring; summary and recommendations 24 suspend all permits related to imports and exports that are not deemed essential. All relevant authorities were given six months to submit justifications for maintaining their respective permits. These were consolidated by the Ministry of Business, which later submitted the final report to the Ministry of Finance.21 Few permits were found to be unnecessary by the report. The proportion of tariff lines requiring at least one permit remained virtually unchanged at around 65 percent. It is difficult to escape the impression that this initiative “labeled as the guillotine approach” has not worked as originally envisaged. 46. Another recent initiative, fueled by the report from Jacobs & Associates on business licensing reform, was also received by mixed reviews by the administration in Mauritius. This report provides an analysis of all licenses within four ministries: (i) Finance; (ii) Health; (iii) Agro-industry and (iv) Tourism. The analysis goes beyond export and import permits, but its broadened scope remains highly relevant for competitiveness and growth in Mauritius. Data gathered in the report allow for some noteworthy considerations: (i) Ministry of Health: there is scope for streamlining import and export permits/clearances for chemical substances and ample scope for streamlining operational licenses for business activities, particularly among providers of medical services (which is important for plans to develop a medical hub in Mauritius); (ii) Ministry of Agro-industry: there is scope for eliminating import clearances on food items (such as onions, potatoes and garlic) and ample scope for streamlining import and export permits/clearances for live animal products, plants and fish; (iii) Ministry of Tourism: there is ample scope for eliminating and replacing with other instruments operational licenses for hotels, guest houses, restaurants, and sport activities; and (iv) Ministry of Finance: there is ample scope for streamlining operational licenses for activities involving alcoholic products and gamming. When presenting the findings to stakeholders, areas of disagreement emerged. This once again demonstrates the importance of devising an effective strategy to bring about the necessary changes. 47. Albeit difficult, regulatory reforms can be done. First, it should not be forgotten that Mauritius is a top reformers in terms of tariff reforms, and such a success can open the way to further reforms in the regulatory and trade environment. Success brings credibility to reforms. Second, Box 6 presents lessons from the successful Korean experience and general operational commonalities in a group of 6 reformers. At the outset, it is worth underscoring that such reforms are a long-term process. For instance, the Mexican successful experience in the late 1990s took longer than expected (five years). The examples of Sweden and Hungary also took longer than one year.22 21 This work was carried out by the Permit Review Committee led by the Ministry of Business which is different from the joint public-private committee mentioned before. 22 Jacobs report reference 25 Box 6: Regulatory Reform Korean Experience23 Lessons for Reformers Background. By the 1980s the Korean economy had become one World Bank (2009) provides an analysis of six countries that underwent of the most regulated market economies. The regulatory system important regulatory reforms - Hungary, Korea, Mexico, Australia, Italy became too large and complex for the government to handle; rife and the United Kingdom. The study provides 10 operational lessons in how with inefficiencies and distortions. Regulatory reform became an to launch implement and sustain regulatory reform. official policy but initial reform attempts were not very successful. It appears that the concept of reform was too narrow and 1) Identify and exploit multiple drivers of reform. fragmented. The approach used was of bureaucrat-led reform with a “bottom-up” approach which pitched bureaucrats against private 2) Use a crisis if available, and lock in political leadership and sector and constrained innovation in regulatory methods. Also, bipartisan political support through new institutions, formal there were “Sacred Regulations” which were considered too agreements, implementing legislation, and international socially sensitive and important. agreements. Regulatory reform reinvigorated after Asia crisis. The Basic 3) Aim for systemic change, but use one-off reforms to build Act on Administrative Regulation (BAAR) enacted in 1997 momentum. required the establishment of a Presidential Regulatory Reform Committee (RRC), the registration of all regulations, mandatory 4) Start reforms with a clear, well-designed medium-term strategy RIA on all new and important regulations, the definition of general that has room to evolve. principles of regulatory reform and a Comprehensive Regulatory Improvement Plan from each Ministry in every year. Each 5) Put transparency at the heart of the process and reform contents. ministry had to prove the need for its regulations before RRC. By the end of 1999 the number of regulations had been reduced from 6) Maintain effective, ongoing communication at all levels. 11125 to 6,308 of which 2,411 had been modified. 7) Ensure that the implementation strategy adapts to different Lessons from the Korean Reform. Regulatory reform needs to stages of reform. be seen as an essential part of the government function and the more appropriate model is one of “Bureaucrats against 8) Encourage change and develop relevant skills in the public bureaucrats”. The control of regulatory quality by an independent administration. agency at the center of government is essential to ensure consistent reform principles are applied across the government. The focus 9) Monitor and evaluate to keep players on track, and publicize should not only be on changes to regulations but also on actual results to sustain reform momentum. implementation of those changes. 10) Prepare for a long commitment. 48. On the basis of the good OECD practices, domestic political economy and lessons from international experience, the following set of recommendations is made to address key weaknesses of the trade regulatory environment in Mauritius: (a) Empower the champion: Improving the regulatory environment is often about leadership and coordination. Within this vision, the recently created NTB Review Committee as a leading body to promote a systematic approach for enhancing trade regulatory policy in Mauritius has been a major step forward.24 Successful international experiences in broader regulatory reform show that high-level coordinating bodies play an important role in such processes. In addition to the Regulatory Reform Committee in Korea (Box 6), the cases of Australia, United Kingdom, Mexico and Hungary all confirm that a professionally staffed body with strong backing from the Ministry of Finance and/or the Prime Minister Office is indeed an important driver of the reforms.25 In the case of Mauritius, the committee can also 23 Main source: Kim (2005). 24 During preparation of this report in 2009, a World Bank mission visited Mauritius and emphasized the importance to establish a permanent regulatory review committee. 25 World Bank (2009) 26 provide an important platform for building rational consensus and overcoming vested interest or organized opposition. In this context, development of technical capacities - like setting up a framework for regulatory impact analysis - is a particularly important avenue to pursue since it grounds the debate on sound methodologies and hard evidence. The Committee’s main objectives should be to benchmark regulatory policies affecting trade, propose solutions based on international good practices (but suitable to the Mauritius context) and support their consistent implementation across Government. The 2010 budget speech reinforced the role of the committee, co-chaired by the Secretariat to Cabinet and the Private Sector, in streamlining and modernizing license/permits systems in Mauritius. It is now particularly important to further support the committee’s role in effectively shaping the policy environment. (b) Develop incentives that will encourage administrations to push the reforms themselves: In parallel to this impulse coming the top, through the coordinated effort from the NTB Review Committee, there is a need to motivate further the administrations themselves by an action emanating from the bottom to the top. Lessons from international practice suggest that monetary incentives help compensate for eventual losses as the result of the elimination of procedures. For example, in France, the administration with the best idea to streamline procedures under its responsibility is awarded a prize every year. In other countries, a competition is organized with the winner receiving a distinction from the Prime Minister or the President. In short, the objective is to provide “carrots” for administrations to reform themselves. (c) Involve the private sector: The first action is to listen to the private sector about the concrete impact of regulations on business, while the second is to introduce an appeal mechanism allowing the dispute of procedures and administrative decisions. It is the private sector that feels the first pinch of regulatory burden. Listening to its complaints and analyzing their merit through a competitiveness lens is an important way to identify what needs to be done. However, this requires a different mindset from the public officials: one that views the interaction with the business community as a sounding board for potential proposals to improve the policy environment. In Mauritius, this is particularly important for SMEs that face a more difficult task in organizing themselves to make their voice heard. Indeed, a success factor of the Korean reform experience was the incorporation of satisfaction level surveys and feedback into the process. Formalizing such type of consultation will not only contribute to an even playing field, but it will also sustain the reform process through strong involvement of a wide range of stakeholders. Additionally, SMEs are ill equipped to dispute regulatory procedures or administrative decisions, while bigger companies can escalate issues and have them examined at higher instances through its networks. A formal appeal mechanism that recognizes the legitimate right of any producer to inquiry about a particular situation pertaining to his/her operation is an important element of a competitive regulatory system which minimizes the chance of penalizing the private sector unnecessarily. 26 This is 26 For instance, Rahman (2009) cites Tax Revenue Appeals Tribunals used in the UK, Canada and. Institutionalized and transparent appeal procedures can in fact be extended to other aspects of the trade regulatory environment, providing the private sector with a streamlined and unbiased outlet for settling disputes with the government. 27 also an issue of democratizing access to conflict resolution instruments, once again particularly important for SMEs and micro-enterprises. (d) IT solutions should be integrated to promote transparency, control/supervision and coordination along the regulatory reform process while supporting trade facilitation. Transparency has been recognized as a key element of successful regulatory reforms – FIAS (2009). It strengthens market confidence in the regulatory process and reduces risks by managing public expectations. IT solutions provide a nice platform for leveraging transparency of regulatory policy in Mauritius. There is already an on-going E-Government initiative aiming at the electronic delivery of quality services to the citizens and the business community. Such initiative should be explicitly used to facilitate exchange of information regarding regulatory policy, fostering public participation and stakeholder involvement along the reform process. It can also play a coordination role by contributing to an efficient flow of information across Government agencies. Last but not least, as pointed out by Alavi (2008) when discussing the successful Tunisian experience in using IT solutions for trade facilitation: “… extending electronic processing to all import and export administration and all agencies involved in trade transactions (not only customs), and developing their “back offices” to handle electronic processing of trade documents , is a key success factor”. (e) Review use of mandatory standards and consolidate metrology activities. The use of mandatory standards and technical regulations by MSB and line ministries should follow international good practices and focus on safety, health and environment hazards. The standard system should not be used as an indirect form of trade protection and quality issues should be addressed through voluntary standards. There is also a need to improve coordination in the provision of standards services, possibly consolidating metrology activities under one authority. 28 Labor Markets: Embracing Transformation for Continued Job Creation for All27 Marie, 45 years old, has lost a twenty-year-long job in the textile factory… 49. Marie, 45 years old, has lost her job in the textile factory that had employed her for the past 20 years. She has no specific skills as she went barely to school. She received some training assistance from one of the government agencies but has not been able to secure a new job so far. Concurrently, Vijay is the manager of a new ICT company, who has been looking for new software engineers to strengthen his team. In spite of several advertisements, he has only received a few offers, but none of them corresponded to his needs. What should Marie and Vijay do? 50. These two individual stories illustrate existing issues in the labor market in Mauritius. In spite of a well functioning market, capable of absorbing workers with a minimal level of unemployment, it has become increasingly difficult for new firms operating in sophisticated sectors to find skilled labor – the high end of the spectrum. Simultaneously, unskilled workers have lost their jobs, as part of the adjustment process from a low to high value added economy, but have not been able to find another employment –the low end of the spectrum. Addressing these two issues is key for the Mauritian economy because they play a central role: (i) in its quest for higher productivity; and (ii) in maintaining the social stability and unity among the population. A well functioning labor market 51. Mauritius is in an enviable position when compared to many other countries. Net employment creation surpassed the growth of the Mauritian labor force by approximately 12,000 workers (a bit over 2 percent of the labor force) between 2006 and 2009 (see Figure 14). If one excludes the year of 2009, negatively affected by the Global Crisis, the excess growth of employment with respect to the labor force was approximately 20,000. These figures are in sharp contrast with the 2001-2005 period during which labor force growth exceeded net employment creation by approximately 15,000 workers. International comparisons also show that, between 2001 and 2006, Mauritius was lagging behind other developing economies and world averages in terms of generating enough employment to cover labor force growth, but has become a top performer since 2006. The shift in performance between 2006 and 2009 has been remarkable (Figures 14 and 15). 52. Unemployment rate went down between 2006 and 2008. Mauritian strong job creation took place while unemployment was falling in absolute terms – Figure 17 (graphs a and b). Overall unemployment rate fell from 9.5 percent in 2005 to 7.2 percent in 2008. This positive performance has been mainly explained by the decline in female unemployment rates. It is true that increases in inactivity among women following retrenchment of the textile sector contributed to the decline arithmetically, but strong female employment generation, particularly among young entrants in the service sector, was a major driver in the process. Male unemployment has also fallen since 2006, but from an already relatively low level. In 2008, unemployment rate among men was 4.1 percent, arguably frictional. The good momentum in the Mauritian labor markets was interrupted in 2009 when the unemployment rate increased 27 The African Development Bank has co-financed the following background study for this chapter: Echevin and Bastos (2009). 29 mildly to 7.7 percent due to the effects of the Global Crisis. Nonetheless, total employment still displayed positive growth during the crisis. Interestingly, this result was entirely driven by female employment. Figure 14 and 15: Employment creation… faster than labor force and economic growth and 25.0 Employment Growth Minus Labor Force Growth Absolute Changes in Labor Force versus World 20.0 Employment (thousands) Upper Middle Income Cyprus 15.0 Malta 2001 2009 10.0 Chile 2006 2009 2001 2006 Singapore 5.0 Hong Kong Mauritius 0.0 2002 2003 2004 2005 2006 2007 2008 2009 4.0 3.0 2.0 1.0 0.0 1.0 2.0 3.0 Percentage of the 2007 Labor Force in each country Change in Labor Force Change in Employment Source: CSO, World Bank 53. Recently, growth has started to generate more employment again. The ability of economic growth to generate employment declined gradually from the mid 1980s to 2002 – when the ratio of employment growth over GDP growth fell from 1.0 to 0.2 – Figure 17 (graph c). This reflected the emerging limits of a labor-intensive growth strategy based on exports of textile manufacturing. Such trend was not a total surprise since Mauritius was successfully raising its per capita GDP while growing global trade meant that cheaper labor could be found elsewhere. After 2002, however, a trend reversal started to appear suggesting a renewed ability of growth to promote job creation. This was reinforced in the years of 2006, 2007 and 2008 when the GDP growth rebound was more than matched by strong employment creation. If the current development stage of Mauritius makes it unlikely to expect the type of employment response to growth observed in the early 1980s, the recent elasticity of 0.4 is close to the one observed in emerging economies such as Hong Kong, China, and Chile. 54. Why growth led to more job creation in Mauritius over the recent years? (a) Flexibility across sectors: Sectors affected by the phase out of trade preferences shed labor between 2000 and 2008, while activities such as ICT, retail and tourism absorbed significantly more workers. Non-textile manufacturing and financial intermediation also became important channels of labor absorption- Figures 15 and 16. More importantly, from 2006 onwards, the ICT sector accelerated its pace as a key employment generator while job losses in sugar and textile stabilized. The ability of the economy to quickly alternate between withdrawal and deployment of its available labor input across sectors supported economic transformation, growth and total employment creation. 30 Figure 15 Figure 16 Employment Share of Selected Sectors Net Employment Change Selected Sectors (2000 2008) Financial Intermediation Financial Intermediation Transport, Storage, Communication + Real Estate, Renting and Business Act Transport, Storage, Communication + Real Estate, Renting and Business Act Hotels & Restaurants Hotels & Restaurants Wholesale & Retail 2008 Wholesale & Retail Non Textile Manufacturing 2000 Non Textile Manufacturing Textile Manufacturing Textile Manufacturing Sugar Cane Sugar Cane 0.00 5.00 10.00 15.00 20.00 30.00 20.00 10.00 0.00 10.00 20.00 30.00 Share of Total Employment % Thousands of Workers Source: CSO (CMPHS) (b) Flexibility within sectors: Analysis of establishment-level data (Survey of Employment and Earnings, CSO) reveals that so-called large establishments (10 employees or more) have been experiencing high levels of gross job flows already before 2006. Indeed, simultaneous job creation and job destruction in sectors such as Manufacturing, Real Estate, Construction and Retail were quite high between 2004 and 2008 (see table 3), revealing strong reallocation of labor within sectors. Mauritius’ ability to cope well with such gross job flows favored a process of creative destruction that is typical of more developed economies. The manufacturing sector is a case in point as textile firms went through a widespread restructuring. Vertical integration and upgrading of final products allowed for job creation in the midst of intense destruction. In the process, even small firms acquired capital and internalized additional production stages to climb up the value chain. This is well reflected in the decline of manufacturing job destruction rates, coupled with the excellent job creation performance after 2006. If the textile sector had not been able to adapt, the 2006-2009 strong labor market performance would not have materialized in net terms. Flexibility within sectors meant that firms and workers were able to take advantage of existing opportunities and adapt to change. Table 3: Job Flows in Selected Sectors Job Creation Rate Job Destruction Rate 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Agriculture 7 6 6 14 6 15 18 13 9 38 Construction 17 4 12 19 12 14 27 5 13 12 Electricity, Gas, Water 0 0 0 0 0 0 0 0 0 0 Financial Intermed. 4 10 3 9 15 3 1 2 6 3 Fishing 5 0 0 0 0 0 1 0 1 0 Hotel, Restaurant 12 24 4 6 19 10 3 38 2 4 Manufacturing 96 88 28 102 67 164 184 93 79 65 Real State + ICT 85 53 12 48 53 16 19 21 13 28 Transport , Storage 4 5 2 4 6 6 3 4 3 2 Whole Sale, Retail 32 28 14 33 33 22 30 37 19 16 Source: CSO, World Bank Staff Calculations 31 55. Which factors explained the flexibility? (a) Wages were anchored to productivity and played an allocational role: Mauritius is still not well-placed in terms of infrastructure, technology absorption and professional qualifications to command a strong pace of growth in salaries without threatening competitiveness of the private sector.28 Following the successful experience in Nordic countries, the wage bargaining process was further centralized through the establishment of the National Pay Council for pay rounds after 2006.29 This new mechanism explicitly allowed wage adjustments to reflect productivity gains and favor employment. This has proven to be an important institutional underpinning for wage moderation, which helped to sustain competitiveness especially among large establishments. Average real annual growth in wages was 2 percent between 2006 and 2009.30 More importantly, wages adjustments were differentiated across sectors, stimulating their allocational role in terms of employments. Economic activities requiring deeper employment adjustment recorded negative real wage growth in the period, reflecting market forces at play – Figure 17 (graph e). This contrasted with the previous six years, when wage increases were linked to CPI only. During that time real wages grew much faster than labor productivity. (b) Smaller employers and self-employment consolidated their importance as channels for job creation. Figure 17 (graph f) shows that employment growth in establishments with 10 or more employees has fluctuated significantly since 2002, with women being more subject to the volatility. By contrast, employment outside large establishments (which include own account workers in this case) has been able to compensate for some of these fluctuations and functioned as a labor market stabilizer during this period. This role was enhanced by the adoption of the Business Facilitation Act in 2006 that represented a landmark in terms of microeconomic reforms to support growth, whereby SMEs and self-employment were set out to play a dynamic and pro-active role in job creation rather than being simply a stabilizer.31 As a result, between 2006 and 2008, a more balanced employment growth took place across genders and firms’ size categories. In 2009, employment outside large establishments (including own account) neutralized job losses in establishments with more than 10 workers despite the impact of the Global Crisis. (c) Government programs helped to cushion worker reallocation pressure as the labor regulatory framework was being revised to increase flexibility. The Employment Rights Act and the Employment Relations Act, both proclaimed in 2009, were the product of 28 In fact, low labor costs are still an advantage in the Mauritian manufacturing. Using comparable data from the CSO and the US Bureau of Labor Statistics, manufacturing hourly labor costs in US Dollars for the year of 2007 were: 1.57 in Mauritius, 1.13 in Philippines, 0.61 in Sri Lanka, 2.92 in Mexico, 5.78 in Hong Kong (SAR), 6.58 in Taiwan, and 8.47 in Singapore. 29 For a review of literature, see L. Calmfors, Centralization of Wage Bargaining and macroeconomic performance – A Survey, OECD Economic Studies, n. 21, 1993. 30 Calculations are based on the Survey of Employment and Earnings and CPI inflation. 31 In particular, firm entry requirements have eased substantially. The number of days required to start a business in Mauritius reduced from 46 in 2005 to 7 in 2007. According to the latest Doing Business (2010), this indicator has been further reduced to 6, which is well below OECD average (13), equal to Hong Kong’s performance and close to Singapore (3). 32 consultations with private sector and labor unions, which started back in 2006 and represented a major revamping of the labor regulatory framework. Among leading changes, redundancy procedures became more flexible and an unemployment insurance called the workfare program was introduced.32 Improvements were well captured by the 2010 Doing Business Ranking as Mauritius climbed up positions in the “employing workers dimension” from 65th to 33rd. Prior to 2009, despite the relatively rigid labor legislation, labor market adaptation was made possible by a combination of active labor market programs targeting displaced workers from the sugar and textile sectors, SME development and incentives to boost placement of labor force entrants (most notably to ICT). Such interventions were essential to support employment creation and the re-balancing of sectoral roles as strong private investment took place in some new activities. 56. Labor policies have been a key vehicle to maintain the social pact among the Mauritian society. Firstly, wage inequality has remained constant overtime. Contrary to what is commonly observed in other emerging economies, trade liberalization has not induced increasing wage differentials so far. In fact, between 2001 and 2007, the real hourly wage shows similar cumulative changes across different percentiles of the wage distribution, with a slightly stronger increase for female workers at higher-paying jobs – an econometric decomposition exercise indicates that this latter increase is explained by an improving skill composition of female employment.33 Secondly, during periods of economic slowdown, there has been limited cyclical job destruction. Figure 17 (graph c) captures this non-linearity between employment growth and GDP growth, suggesting that cyclical adjustments do not take place through massive labor lay-offs in Mauritius. Additionally, a web of social assistance programs has been an important ingredient in this social pact as we further discuss in the next section. 32 The program is designed to provide immediate assistance to laid-off workers in the form of a transition unemployment benefit coupled with either one of the following: job search assistance, training program or entrepreneurship program. 33 In other words, female labor displacement from textiles and strong growth of service sector jobs explains the shift in the wage distribution for women as a result of changing skill mix. The econometric technique used was proposed by Juhn et all (1993). See Appendix for the results of the analysis – data used: CMPHS between 2001 and 2007. 33 Figure 17: Labor Market Performance a b 600.0 16+ Female Population (thousands) 18.0 600.0 16+ Male Population (thousands) 7.0 16.0 500.0 500.0 6.0 14.0 114.6 109.2 107.5 5.0 107.5 102.4 98.6 99.1 98.2 400.0 12.0 400.0 95.8 285.0 282.1 Thousands Thousands 283.4 14.6 16.0 276.3 18.6 274.4 20.2 19.2 276.6 20.0 4.0 274.5 10.0 19.6 272.4 18.0 267.7 18.4 300.0 300.0 % % 8.0 3.0 200.0 25.8 27.9 6.0 200.0 355.7 355.3 30.6 28.2 347.1 340.5 338.5 31.7 336.8 331.4 24.6 328.2 325.3 16.4 18.8 20.5 2.0 4.0 189.5 187.3 100.0 176.6 174.8 100.0 168.7 167.6 167.4 166.8 165.0 1.0 2.0 0.0 0.0 0.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2001 2002 2003 2004 2005 2006 2007 2008 2009 Employed Unemployed Inactive Unemployment Rate (RHS) Employed Unemployed Inactive Unemployment Rate (RHS) c d 12.0 1.2 GDP Growth vs Employment Growth 1984 2009 Employment Growth over GDP Growth 10.0 1.0 8.0 0.8 GDP Growth 6.0 0.6 4.0 0.4 2.0 0.2 0.0 0.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Employment Growth Ratio o Employment Growth divided by Output Growth Polynomial Trend e 4.00 Sectoral Real Wage Growth f (annual average for the period) 25.00 Contribution to Absolute Employment Growth 3.00 Gender and Establishment Size 2.00 20.00 1.00 15.00 Thousands Workers % 0.00 10.00 Education Mining Health Construction ElecGasWater OtherComm HotelsRestaurants PublicAdmin AgricultureFishing Financial TanspStoComm WholesaleRetail Manufacturing RealEstateBusinessAct 1.00 5.00 2.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 3.00 5.00 10.00 2006 2009 2000 2006 Male Large Estab Male Other Female Large Estab Female Other Source: CSO, World Bank 34 57. Yet, a new social pact centered on individual opportunities and targeted protection for the most vulnerable should gradually set in to accompany the structural economic transformation that is taking place within the Mauritian economy. In 1990, nearly 50 percent of Mauritian workers were employed in the agricultural or manufacturing sectors – mostly sugar and textiles. Another 12 percent were employed in the Public Sector (Education and Health included). The range of occupations was narrow and individual opportunities more limited since a Government job was virtually the only option for well-educated Mauritians. Today labor churning is at the center of the development process in Mauritius and increasing wage disparities are expected to emerge as the result of differentiated opportunities and capacities among workers. The Government has taken important steps to create the regulatory underpinnings for such change (new labor law and wage-setting institutions) and the private sector is creating jobs for skilled workers in response to the overall business environment reforms. 58. Moving from a regulated to a flexible labor market has and will continue to push and pull economic opportunities, leading to a dynamic and diversified economy over time. Yet, this process requires a close attention to the low and high ends of the labor market. Low-end of the market: What to do with unskilled workers? 59. Mauritius is a transforming economy and creative job destruction is at the center of the process. Inevitably, some people have been left out of the labor market or are at a substantial risk of being so. They face significant challenges in overcoming such situation. Who are they? (a) Mauritian older women with low educational attainment and a background in the textile sector: No other group has been as affected by the phase-out of trade preferences as the women working in the textile sector. Approximately 15 thousand lost their jobs between 2001 and 2005. This has been reflected in the female unemployment rate which increased from 9.5 percent in 2001 to 16.4 percent in 2005. Workers that have remained employed in textiles are at substantial risk given the continued need for the sector to remain competitive by reducing wages. Foreign labor from China, India and other Asian countries is imported and regarded as more productive and cheaper than local labor (workers are willing to work longer hours for the same monthly wage). In general, women with background in textiles are old with little human capital and very weak prospects for labor market re-engagement in a modern Mauritius. (b) Mauritian youth with low educational attainment (… and the upcoming “structurally unemployed males”). Educational attainment is strongly associated to unemployment in Mauritius. Not passing the Certificate of Primary Education (CPE) exam severely constrains educational choices; not passing the Cambridge School Certificate (SC) exam – first of two exams taken at the secondary level – also leads to higher unemployment incidence. Data for the third quarter of 2009, shows that almost 20 percent of the total unemployed had below CPE attainment, which translated into a very high unemployment rate for that group. At the same time, only 5 percent of the unemployed had tertiary education. Current CPE pass rates are low and they do not show an improving trend: about 60 percent of men and 70 of women are approved each year. The situation with the SC exam is also worrisome. While the overall SC pass rate has fluctuated around 75 percent, pass rates of men are not following improved performance of women. Today, 35 unemployment men are already predominantly younger (below 30) and single. Given the differential performance in educational attainment, the situation of unskilled young men has the potential of becoming a more complex structural phenomenon than the existing unemployment among older females displaced by retrenchment of the textile sector. (c) Mauritian children from impoverished and vulnerable households. Poverty in Mauritius is low and it has remained stable over the last decade. Extreme poverty as measured by “the proportion of the population living below $ 1.25 (PPP) a day” was less than 1 percent according to the latest Household Budget Surveys (HBS) of 2006/07. However, a survey made by the Government in 2008 indicated that around 7,000 families were living in extreme poverty across 229 regions in the country. Relative poverty went from 8.7 percent of the population (1996/97) to 7.7 percent (2001/02) and, finally, 7.9 percent (2006/07).34 Based on 2006/07 data, (relative) poverty incidence is found to be more prevalent among (i) households headed by divorced/ separated persons (17.3 %); (ii) households with one parent and unmarried children only (13.5%); (iii) households headed by persons with educational attainment below CPE (13.2%); and (iv) female headed households (11.9%). Children belonging to any one of these groups face significant challenges to human capital accumulation and are likely to inherit the vulnerability that exists in their households. 60. There are growing indications that the most poor and vulnerable need to be better targeted in the Mauritian social protection system as the economy transforms. Mauritius’ social protection system (social assistance and social insurance) played a central role in the country’s development history. The system delineated a redistributive welfare state that allowed trade rents to be shared with other segments of the economy. This arrangement helped to maintain social cohesion and democratic practices which ultimately supported investment and growth in the preference-based sectors. Now that trade preferences are phased out, the social protection system also needs change. Adjustments are necessary not only to promote incentives for labor market participation and human capital accumulation, but also because there are increasing signs that the most poor and vulnerable are not benefiting from existing safety nets anymore. Indeed, preliminary evidence from Government’s efforts in surveying beneficiaries suggests that only one quarter of the absolute poor is receiving social aid. At the same time, it is likely that some existing beneficiaries of various other programs should not necessarily qualify for government assistance. 61. The vast majority of social programs in Mauritius already existed before reforms started in 2006. They included cash transfers, in-kind assistance, active labor market policies and community-based programs. A recent assessment from the World Bank (2010b) observes that “a striking feature of the social assistance landscape in Mauritius is the number of programs and the multiple ministries, foundations, and special funds involved in the provision of non-contributory social assistance”. The assessment concludes that there is (i) inefficiency in key social assistance programs, (ii) poverty among the elderly despite universal non-contributory pensions, (iii) lack of targeting in education based safety nets, (iv) a number of labor market programs coexisting with provision gaps as many unemployed do not benefit from them, and 34 Relative poverty is defined as the “proportion of households below the half median monthly household income per adult equivalent” – see 2006/07 Poverty Analysis at the CSO website: www.gov.mu/portal/site/cso. The average monthly household income for the (relative) poor was found to have grown, in real terms, by 3.5 percent between 2001/02 and 2006/07, reaching an estimated value of Rs 7,005 (approximately US$ 230). 36 (v) fragmented approach to the extreme poor. The Government is aware of these weaknesses and the Ministry of Social Security has taken the lead in the in the process of refocusing the social protection system. The Ministry of Finance is directly involved in the process and both the UNDP and the World Bank are providing assistance. 62. In 2006, a new push for social support programs targeting unemployed and redundant workers was introduced. In the first year of the reforms (2006), Government announced the creation of the Empowerment Program (EP) as an integral element of its competitiveness agenda. The EP included several activities such as training, placement, special programs for unemployed women, support for SMEs, development of tourist villages and provision of social housing. The motivation underlying the EP was twofold. Firstly, it was an accompanying measure to the aggressive economic reform program aiming at minimizing social and political costs of adjustment. Secondly, it reflected a sequencing strategy for tackling deficiencies of the existing web of social programs: strengthening assistance to vulnerable should precede any attempt of consolidating the existing programs. Additionally, the term “Empowerment” symbolizes the core principle of supporting people to lift themselves out of labor market exclusion, rather than creating lifetime entitlements. In this context, it would be politically easier to formulate and adjust incentive structures under the recently created EP programs than to revisit long standing ones. 63. Overtime, important steps towards the institutional consolidation of new programs have taken place, and the EP evolved into the National Empowerment Foundation (NEF). The NEF is an umbrella organization that houses the original initiatives under the EP and new ones such as Circular Migration, the Absolute Eradication Program, and the Entrepreneurship Program, among others – see table 4. Even though there are well –defined targets and monitorable indicators of performance for the programs, modern techniques of impact evaluation are not applied which makes it difficult to judge their cost effectiveness. Table 4: Programs Created to Support Economic Adaptation since 2006 (Additional to already existing social assistance programs – over 50 programs) Programs Institutions involved Placement for Training Program NEF, HRDC, MQA Workfare program NEF, HRDC, Ministry of Labor Mix of Work and Training NEF, Ministry of Labor, Enterprise Mauritius, HRDC Circular Migration NEF, MOFEE Espace des métiers NEF Life Skills Program (Développement social integer) NEF, NGOs Special Entrepreneurship Programme NEF, ENTREPRENEURS (MENTORS) Special Program for Unemployed Women (SPUW) NEF Eradication of Absolute Poverty NEF, NGOs 64. The Placement for Training Program (PTP) is viewed as the leading NEF initiative that has supported strong job growth in the service economy. The PTP provides the labor force with an opportunity for job placement coupled with work-related formal training. The program subsidizes both (mandatory) training and the stipends paid by the employers to the trainees. Its length varies from 3 to 12 months and, since its creation in 2006 and up to December 2009, the PTP placed around 8,000 workers. Its cost is relatively low (around 0.01 percent of GDP in 2008/09 and around US$ 60 per worker per month), but assessing effectiveness is complicated by the lack of rigorous impact evaluation studies. The program has become the most well-known active labor market policy designed to facilitate social adjustment to 37 competitiveness reforms in Mauritius. A recent evaluation study, based on ex post interviews with participating employers and labor force, collected useful empirical evidence which we use to draw the following considerations:35 The PTP has not been a key generator of employment among the low-skilled. Confirming what was already known, the vast majority of placed trainees are relatively well educated young workers in the ICT sector. The evaluation study indicated that 3 out of 4 in the sample were indeed placed in that sector – more specifically in BPO /Call centers. Additionally, 80 percent were between 18 and 25 years old, well distributed across genders. In terms of occupation, Marketing and Sales & Distribution represented the leading absorber of trainees, followed by tax & accounting and human resources. As a consequence, high school degree holders were the ones mainly benefiting from strong job creation under the PTP. Indeed, table 5 provides details on the level of education for a larger sample of 6,200 unemployed, trained and placed, out of the 8,000. About 84% of trained and placed had a secondary degree. The PTP has been a key generator of employment in the ICT sector, but it is important to qualify its ability to address labor market mismatches among the low-skilled. There is a shortage of skilled labor in Mauritius, so one could wonder why subsidize employment generation in a tight labor market such as ICT. The study indicated that more than direct financial subsidies, employers valued the ability to sort out which candidates are promising while firm-specific training was taking place. So the PTP effectively functions as a cost-sharing arrangement for dealing with match quality uncertainty. Although the training component was reported as useful (particularly if provided in-house), it is clear that it does not provide the basis for dealing with labor market mismatches entrenched in structural educational deficiencies. The Life Skills Training component of the PTP has boosted the employability of the low skilled. Trainees with low educational attainments – less than secondary diplomas – are predominantly placed in manufacturing or specific service sector jobs (hotel sector in particular). A Life Skills Training component targeting this group has been piloted in 2007 to improve work attitude. Both employers and trainees provided a very good assessment of the course. Trainees were overwhelmingly perceived to have improved understanding of work values, ability to manage personal problems and developed better relationships with superiors. However, level of awareness about the program was very low – only 11 percent of all respondents reported to be aware about the initiative. Among those, only 38 percent actually took the training. The majority doing so was male and above 30. 35 The study’s title was “Evaluation of Placement for Training Program under the Empowerment Program”. It was commissioned by the National Empowerment Foundation and delivered in June 2009. The considerations made (bullet points) are not necessarily policy recommendations contained in the study, but rather our interpretation of its results. Please refer to the document for full details. 38 Table 5: Level of Education of the Unemployed trained and Placed36 Education Level Number of Unemployed Total number of Female Male unemployed CPE Failed; CPE 349 58 407 Passed; PVT Form 3, Form 4 341 184 525 SC Failed 37 31 68 SC Passed 1725 1536 3261 HSC Failed 17 12 29 HSC Passed 1027 883 1910 Total 3496 2704 6200 Source: National Empowerment Foundation 65. Life skills training appears to hold great potential for boosting labor market prospects of the unskilled youth and helping to break a vicious circle of poverty. Consultations with the private sector - especially among SMEs in retail, construction and non-textile manufacturing which could potentially hire the unskilled - consistently revealed a deep concerns about motivation and reliability of the young unskilled workers. In this context, one employer has even stated that Mauritius faces a shortage not only of skilled, but also of unskilled workers. This ultimately limits job creation and labor market inclusion at the low end of the skill spectrum. Life skills training offer an opportunity to address this bottleneck. The PTP has adopted it as a way to reduce drop-out rates among trainees, but its potential scope is much wider. Indeed, a life skills training component could be present in any second-chance initiative targeting the unskilled and should be integrated into the vocational training curriculum as well. Benefits go beyond what the attendee can gain in the workplace, positively impacting his/her attitude towards risky behavior (drugs, crime) and parenting skills. Some noteworthy features of recent World Bank projects with life skills components in Asia and Latin America are:37 (i) training caters to employer/sectoral needs and is carried out in partnership with the private sector; (ii) project design is kept simple and scope of the operation intentionally limited (for instance, focus on private sector-driven skills training); (iii) tie training to internship in the private sector; (iv) monitoring and evaluation of courses are essential; (iv) training grants allocated on a competitive basis among training providers. 66. Special migration arrangements can play an important role in helping to accommodate further dislocation of unskilled and semi-skilled workers. The restructuring of the Mauritian domestic economy, particularly manufacturing, has caused displacement of workers and changes to patterns of labor demand. Deepening trade and investment climate reforms is likely to create further pressures for the adaption of economic sectors/activities which were once protected from international competition. As a result, additional labor displacement of unskilled and semi-skilled workers will need to take place. While some growing sectors, like construction and competitive textiles, are currently importing workers from other countries, it is not correct to assume that displaced labor from elsewhere in the economy will be easily absorbed in those sectors. Important differences in conditions of employment and skills requirements imply limits to labor adaption in the short-run. In this context, special migration arrangements like the ones Mauritius established with France and Canadian companies provide a 36 The table only presents education level up to HSC. 37 These include projects for St. Lucia, the Dominican Republic, Moldova, Indonesia and Chile. 39 potentially important mechanism for supporting on-going economic transformations.38 As Mauritian nationals with weak employment prospects today are given a chance to engage in productive employment abroad, the country’s ability to tolerate a faster pace of economic transformations increase. Moreover, in the medium-run, migrants can further contribute to their home economy either through bringing back higher levels of human capital and savings or through increased remittances. 67. The Government should provide support to targeted unskilled and semi-skilled emigration as required by the pace of economic transformation. The Government of Mauritius should consider providing an array of services supporting targeted emigration of unskilled and semi-skilled workers in sectors/occupations that are being downsized as part of on-going economic transformations. After identified, potential emigrants could benefit from “training-to-emigrate” services, regulation of recruitment procedures, managed deployment and protection/representation – see box 7. A concern one may have is that, if given a chance, many Mauritians would be willing to emigrate, particularly to developed economies. Then, if really successful, such special migration arrangements could have the effect of aggravating labor shortages in Mauritius. While it is debatable whereas strong emigration of unskilled and semi-skilled would hurt the country, there is clearly no strong rationale for Government to use public resources in order to promote widespread emigration as the sole way for supporting economic transformation. Special migration schemes of unskilled and semi-skilled should be used strategically as one additional tool to facilitate labor market adjustment and promote human capital development. 39 Box 7: Managing Migration – Adapting Lessons from The Filipino Experience Background. Approximately 25 percent of the native Filipino labor force (8.2 million) live abroad. Filipinos represent 30 percent of the world’s sea-based employment and 75,000 workers leave every month for overseas employment. Policies were adopted and institutions built to manage the large migration flows in Philippines. Though obviously on a much lower scale, migration involving unskilled and semi-skilled workers in Mauritius can be informed by the Filipino experience. Key lessons are: Regulation/oversight of recruitment. The Filipino Government, through the Department of Labor and Employment, license private recruitment agencies abroad to combat issuance of false contracts and other violations. Managed Deployment Process. Filipino workers being deployed overseas undergo a mandatory orientation process prior to departure. They learn about destination country customs and laws, resources available at embassies or consulates and other important contacts. Seminars on financial management are also provided. Protection and representation. A migrant welfare fund provides services like emergency repatriation and public assistance programs, including on-site initiatives at embassies and consulates. Coordination of legal assistance services to overseas Filipinos in distress is also provided. Develop recording mechanisms. Both overseas contract workers and permanent emigrants should be registered in appropriate databases. In particular, integrating them into household surveys should provide valuable information for policymakers. Adapting the lessons to Mauritius. Regulation of recruitment is not necessary as a separate step at this stage since IOM is mediating agreements between foreign firms and the Mauritian Government - which guarantees already a satisfactory level of scrutiny. However, Mauritius authorities should be ready to exercise scaled-up oversight in case unskilled and semi-skilled labor starts to be directly hired through private recruiting companies based abroad. Should the special migration schemes mediated by IOM succeed in creating a niche market for Mauritian workers abroad, such form of direct hiring is likely to emerge. A managed deployment process is of crucial importance for unskilled and semi-skilled Mauritian emigrants. Unlike the Filipino worker, Mauritians will not find well established support networks in the new country. To increase the likelihood of a successful international experience, Mauritians will need to be aware about resources available beforehand. Seminars on financial management are particularly relevant to inform decisions and stress the importance of generating financial savings during the temporary contract. Finally, tracking performance of overseas workers is absolutely critical to inform design and adjustments to the programs. 38 The Canadian special migration scheme consisted of a trilateral agreement signed between the Government of Mauritius, IOM and Canadian manufacturing companies. To date, a couple of hundred Mauritian workers have left for Canada on 2 year work visas. There is growing interest among Canadian firms. 39 Main source: Ruiz (2008) 40 68. The Government should continue to formulate, implement and improve social policies targeting those at the low end of the skill spectrum, but the fundamental challenge is long run in nature: education. Low educational attainment is at the root of social vulnerability. Data for the third quarter of 2009, shows that 34.6 percent of the unemployed had primary education only (with 18.9 percent below CPE attainment) and 64.6 percent had some level of secondary education (with 37.4 percent below SC attainment). Hence, those without less than a secondary degree (SC) were almost 70 percent of the unemployed. In contrast, only 5 percent of the unemployed had tertiary education. Additionally, structural educational deficiencies should persist for a while. As an illustration, if we take the CPE and SC pass rates from 200840, out of 100 women (men) taking CPE exams only 58 (44) will get an SC degree. It is essential to quickly improve pass rates, particularly for men. It is equally important to achieve strong educational outcomes in terms of cognitive skills in math and science along with increased pass rates. On-going analytical work from the World Bank is focusing on educational policies and skills development in Mauritius. 69. It must be recognized that some groups face severe employability constraints and relying more on social safety nets, as oppose to active labor market programs, is necessary. Despite efforts to re-engage female displaced from the textile sector back into employment, results are not as positive as one would hope for. For instance, to date, only 200 women have been placed under the Special Program for Unemployed Women (NEF initiative). Not only placement attempts are less successful, but job productivity tends to be low when it happens. There are natural limits to boosting employability and supporting entrepreneurial activity in this case, and more effective support can be provided through social assistance at times. As discussed above, households headed by females, divorce/separated and one parent with unmarried children are more prone to poverty. If the female involved in one these situations has been displaced from the textile sector, she is a clear candidate for social assistance. Social protection reform and active labor market policies cannot be discussed without one another, and it is very important to match policy instrument with policy goal when cushioning the social costs of economic transformation in the country. High end of the market: high tech firms need qualified workers 70. Two important mechanisms underpin the transformation of Mauritius into a high value-added economy: (i) market forces expanding and downsizing sectors according to their potential for wealth generation in a global economy and (ii) upgrading of goods and services produced within each sector (going up the technology ladder). 71. Neither mechanism can be operational without minimally qualified workers. However, the first one generally leads the way once the underlying human capital requirements are softer. As employment is absorbed in sectors with higher capital intensity, an economy can increase average labor productivity and value addition through a purely compositional channel. Figures 18 and 19 show that Mauritius has successfully “transferred” labor from lower to higher capital intensity sectors while increasing the economy-wide capital-to-output ratio. This means that capital deepening took place as this 40 CPE: 62.1 percent (male) and 73.2 percent (women). SC: 71.5 percent (male) and 80.9 percent (female). 41 compositional channel was at play. Additionally, econometric evidence indicates that this process has been accompanied by shifts in relative labor demand towards high educated workers, particularly among females.41 This suggests that skill-biased technological change is at the center of recent economic transformations in Mauritius, which is expected to intensify going forward. Figure 18 Figure 19 109 800 Capital Labor Ratio in 2008 (Manufacturing=100) Real Estate, Renting and Bus Act 107 Capital Output Employment Absorption and 700 Capital Intensity Across INDEX K/Y (2000 Normalized to 100) 600 105 Selected Sectors ICT Sectors 500 103 400 Transport, Storage and Comm 101 300 Hotels & Rest 99 200 Manufacturing Financial Intermediation Agriculture 97 100 Wholesale & Retail 95 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 8 6 4 2 0 2 4 Change in Share of Total Employment Between 2000 and 2008 (Percentage Points) Source: CSO 72. The second mechanism is much trickier to unblock because the lack of high skilled workers is an overarching bottleneck for this to happen. It involves technology absorption, R&D, identification of niche markets and efficient exploitation of linkages in the supply chain. Mauritius is still at the beginnings of creating organic conditions for substantial within-sector value-addition dynamics. 73. Shortage of skilled labor is acute and a fundamental bottleneck to greater competitiveness in Mauritius. Its growth constraining effect will only increase as the economy transforms. A case in point can be provided by the ICT sector which the Government has emphasized as a pillar of the Mauritian economy, achieving very encouraging results in output and employment growth over the recent years. According to the Global Information Technology Report 2008/09, Mauritius has overtaken South Africa as the most ICT-ready economy in Sub-Saharan Africa, and now ranks 51st in network readiness among 134 economies. This performance is underpinned by a strong policy environment, particularly in (i) extent and effect of taxation (8th), (ii) total time required to start a business (9th), (iii) effectiveness of law-making bodies (17th) and government prioritization of ICT (25th). On the other hand, the weakest components of the index reveal that human capital is clearly lagging: availability of scientists and engineers (114th), tertiary enrollment (89th), local availability of research and training services (90th), quality of management schools (90th), and capacity for innovation (99th). Evidence of skilled labor shortages can also be obtained from the www.Myjob.mu portal, which keeps an updated list of vacancies in the private sector. A snapshot of vacancies posted reveals the strong demand for more skilled labor (Figure 20). 41 This result is discussed in Echevin and Bastos (2009) where a demand shift index based on Katz and Krueger (1998) is constructed for Mauritius and compared to supply shifts. 42 Figure 20 Vacancy Distribution as of February 14th, 2010 Accounting/Finance 7% Admin/Clerical 6% Other 19% Call Centers/BPO Tourism Travel 15% 9% Marketing/Sales 7% Engineer/Electronic 4% Logistics ICT/IT/Web 5% 28% Source: www.myjob.mu portal. Total number of jobs listed as of Feb 14 th, 2010 was 391 74. The lack of skills in the labor force impedes the transformation to a higher value added economy. The impact of skills shortages goes beyond unfilled vacancies. When this happens in a systemic way as in Mauritius, it actually discourages entry and new investment which, in turn, leads to unrealized opportunities. For instance, to increase value addition it is important for Mauritius to accelerate the transition from Business Outsourcing Process (BPO) to Knowledge Process Outsourcing (KPO). The later delivers higher value, but also requires more advanced skills and ability to customize solutions to the clients’ needs. As Mauritius continues to struggle to fill vacancies that require an HSC (secondary level) diploma in the BPO sector, it is unlikely that supply chain linkages and synergies will develop and promote the transition into KPO. Such transition is essential as competition from lower cost centers with improving network infrastructure sets in. Moreover, the contribution of the BPO to economy-wide higher value addition will eventually stagnate if the sector does not move up the technology ladder. Despite supply-side shortages, Mauritian labor markets for skilled labor are rather thin and potentially subjected to an insufficient critical mass of qualified workers.42 75. What to do? (a) Active labor market programs. The PTP has achieved great success in placing trainees, particularly in the ICT sector. A total of 5,993 were placed between 2006 and December of 2009. The distribution of training and placement in this sector is well balanced with 45 per cent females 42 One example described by operators in the private sector is of ICT foreign firms looking for workers with particular professional accreditations to open an office in Mauritius. While young university degree holders in the labor market may possess sufficient intellectual ability to obtain such accreditations, the cost of doing so and uncertainty about whether it will be useful act as a deterrent. When a private sector company is making investment decisions, availability of accredited professionals must be met promptly and Mauritius may not be chosen as a destination due to such a type of “thin-market” externality. 43 placed. The majority of the candidates trained and placed (around 85 per cent) have an intermediate secondary education level (form III to form V) and they are predominantly placed in call center operations. Improving the likelihood of successful employment at the end of the trainee tenure should be a priority, and the design of the training component (in terms of relevance for future employers) and the ability to identify promising matches between firm and worker (particularly among SMEs) need to be reevaluated continuously on the basis of trainees and firms feedbacks as well as ex post evaluation (see below). Overtime, government may consider to gradually reduce direct subsidies extended to employers participating in the PTP (at least for large firms hiring on a tight labor markets such as ICT) and focus on mitigating frictional inefficiencies – the www.myjob.mu website is an interesting private sector initiative receiving government support that facilitates matching in the labor markets. Additionally, on-the-job training programs should be strategically used to promote the acquisition of higher skills along the value-chain over the lifetime of the worker. This is important to promote vertical mobility within firms and in the sector, both of which will sustain transformation towards higher value addition. The Human Resources Development Council (HRDC) in Mauritius administers a Levy Grant Scheme (LGS), financed with a 0.5 percent payroll levy, which is in principle well-suited for this task. Working with the private sector to develop a menu of training that supports HR development strategies is important. HRDC may also consider a pro-active approach, perhaps in partnership with the Board of Investments, in which potential investors facing human capital bottlenecks are identified and offered “training packages” tailored their specific needs. The goal here is to address skills shortages not only among existing employers, but also among potential entrants in the market. This is likely to be important in the ICT and Financial sectors. The lack of formal impact evaluation techniques represents a serious limitation to the design and improvement of programs. It is essential to be able to monitor and evaluate workers (earnings and eventual unemployment duration) as well as firms (market share, profits or product diversification) to be able to assess cost-effectiveness of the interventions. The fact that many programs are already on-going, and no randomization has taken place at their pilot stages, can be addressed through the use of quasi-experimental techniques - Mauritius can benefit from the pool of expertise that has developed on this area.43 Ultimately, programs aimed at supporting transformation towards a high value added economy must prove themselves capable of doing so. A sense of entitlement among workers and firms for particular forms of interventions should not be allowed to keep ineffective programs alive. Impact evaluation techniques provide an objective way of making this judgment. Finally, Singapore provides an international experience that may be particularly relevant for Mauritius. Singapore is also a small country that relies on foreign workers to address labor shortages at the same time that older people in the workforce lack skills to benefit from existing opportunities. The Singaporean Government has then created a Workforce Development Agency in 2003 that is leading efforts to promote high performance through policies to redesign jobs in 43 The Development Impact Evaluation Initiative (DIME) led by the World Bank provides a rich repository of impact evaluations and methodological discussions. 44 combination with continuing education and training. The agency also focuses on providing support to firms’ senior management who are responsible for organizational innovation and redesign. Active labor market programs focusing on skills training for employees and SMEs complement this initiative. As noted in chapter 1, Mauritius and Singapore both displayed weak productivity performance despite solid GDP growth over the recent years. The proactive Singapore’s approach to workforce development has already led to promising results in terms of operational excellencies at the micro level as the key for unlocking productivity growth. For Mauritius, this approach is promising as well, particularly as they reach SMEs and promotes the effective utilization of skills available. Another relevant international experience is the one of Taiwan. The country’s growth success is explained by a combination of policies in which education played a central role. Developing specific models for general education and vocational training has been an important feature. One particularly innovative program was to sponsor vocational teachers to undergo summer internships in the private sector in order to better understand its demands and shape the curriculum accordingly. This is again consistent with the objective of promoting high performance working and efficient skill utilization in the economy. (b) Improve links with university students. Consultations with students at the University of Mauritius left no doubt about their strong preference for going abroad upon completion of their Bachelor’s degree. This reinforces well-known anecdotal evidence according to which Mauritius’ students will massively attempt to pursue a Masters degree in a foreign institution if academic performance and financial conditions permit. In many instances the goal is then to secure employment abroad after completing the Masters and remain there for a while at least. Though the rationale for seeking a degree abroad is often perceived as financial (higher wages), students at the University of Mauritius also articulated broader concerns about career development and professional achievements. Strong desire for emigration at the tertiary level should be seen as an asset rather than a drain. The keenness demonstrated by talented young Mauritians on acquiring international experience represents an important asset for the country. Supporting their individual aspirations will maximize motivation and long-run potential, while opening up opportunities for government policies. There is scope for the Government and the private sector to maximize impact of human capital accumulation among university students by leveraging their high motivation to pursue international experience. Awarding merit scholarships for recent university graduates to study abroad will intensify pursuit of professional development. Such initiative could be coupled with the requirement that students would have to spend a short stint (1-2 years) working in emerging sectors of the Mauritian economy prior to being eligible for the scholarships. This would expose students to real bottlenecks and potentially guide future areas of specialization. In partnership with the private sector, the Government should identify initial placement targets for the stint based on the needs of the economy - consultations with stakeholders indicate dire needs in software development/programming and ICT project management. Such type of initiative would also strengthen early linkages with talented Mauritians who in the medium-run may become part of the high-skilled diaspora abroad. 45 Additionally, it is important to track experiences of recent university graduates and systematically use statistical/econometric techniques to inform policies. Box 8 illustrates the point by examining school-to-work transition among graduates from the University of Mauritius. The analysis indicates the importance of monitoring those graduates not finding jobs after 8 months (or less depending on the field of study), which seems to be a threshold for declining escape rates from unemployment. Additionally, the difficulties encountered by Science graduates may warrant targeted government intervention (other than public employment as it seems to be the case) to keep motivation in the area. In particular, linkages between potential private investors and science graduates should be strengthened to support development of activities such as the Land-Based- Oceanic Park or life science projects. Overall, efforts to systematically collect data among all tertiary education institutions in Mauritius and monitor emerging trends to inform policies are important steps to mitigate inefficiencies in the use of scarce high skilled labor. The Human Resources Development Council has a research division in charge of labor market monitoring, so the institutional underpinnings for such an exercise already exist. Partnership with a network of independent researchers and multilateral organizations could provide support in terms of human resources for this endeavor. Finally, recent Singaporean international experience also provides an example of potential cooperation between university, government and private sector. The School of Computing at the National University of Singapore with support from the Government and industry practitioners has formally become a Continuous Education Training center for the ICT industry in the country. Professional training is provided to meet specific demands from the sector and early engagement of university students could be exploited to strengthen linkages with the private sector. The focus is on competency-based training and acquisition of recognized certifications. 46 Box 8: A Study on School-to-Work Transition of Graduates from the University of Mauritius44 The Tertiary Education Commission (TEC) of Mauritius conducted two Student Tracer Studies surveying full-time degree graduates from the University of Mauritius (UoM), the largest university in the country. The first study was done in 2003 and covered graduates between 1995 and 2000. Out of a population of 2,346 graduates over the period, a 40 percent random sample was contacted to answer a questionnaire about their experiences in the labor market upon graduation. After responses were received, the final sample consisted of 505 observations – 22 percent of the total population. The second study was done in 2008 and covered graduates between 2000 and 2005. The total population of graduates was 4,648 over the period. A 50 percent random sample was targeted and a final sample consisting of 860 was used - 18.5 percent of the population. Based on the data collected, econometric survival techniques were used to study job finding probability rates and their covariates. Hazard functions were estimated for each cohort surveyed, indicating the instantaneous probability of exiting unemployment for a graduate that is still unemployed at any point in time. As presented below, for both cohorts, probability of obtaining a job initially increases before peaking at 12 percent after 8 or 9 months and then decreases. Hazard Estimates for Cohort 2008 Estimates for Cohort 2008 .12 .12 .1 .1 .08 .08 .06 .06 .04 .04 .02 .02 0 9 12 24 36 48 60 0 8 16 24 32 40 48 56 64 analysis time analysis time The role of covariates in explaining job finding probabilities in the graduate labor market was also econometrically investigated. Key results were: (i) age is positively associated with lower job finding probability in the 2008 cohort; (ii) gender does not affect job finding probability; (iii) the education levels of the student’s parents do not affect job finding probabilities in the 2008 cohort, but they do have an impact on the 2003 cohort; (iv) field of education significantly affects job finding probabilities in both cohorts. Regarding this last result, graduates of the Faculty of Agriculture, Faculty of Science and Faculty of Social Studies & Humanities display significantly lower job finding probabilities relative to graduates from the Faculty of Engineering and the Faculty of Law & Management. Hence, as presented below, mean job search durations are lower for Law & Management and Engineering. Both fields of study also display higher mean salaries. Of special note is the situation of recent graduates from Science who have higher mean job search durations, low mean salaries and rely on the public sector as a key employer. Duration, Private vs Public and Mean Salary Mean Job Search Employment (%) Duration (Months) Mean Salary (Rs.) Private Public Private Public 2003 2008 2003 2003 2008 2008 2003 2008 Field of Education Agriculture 9.81 9.82 66.67 33.33 62.71 37.29 12491.84 15921.22 Engineering 3.65 4.16 94.83 5.17 84.36 15.64 17219.05 19045.02 Law & Management 4.00 4.34 91.40 8.60 84.42 15.58 16225.00 19072.71 Science 11.29 7.64 78.10 21.90 53.15 46.85 11970.41 13956.10 S.S. & Humanities 6.03 7.38 80.00 20.00 57.43 42.57 13050.39 14883.57 Total 6.64 5.91 83.66 16.34 71.66 28.34 14261.82 17013.40 44 Jaunky (2009) was the author of the underlying background paper on school-to-work transition commissioned for this report. 47 (c) Tapping the Mauritian diaspora. Mauritius has turned to migration policies as an additional way of promoting human resources development and facilitating labor market restructuring. It joined the International Organization for Migration (IOM) in 2006 and since then has been working with the Development Community at large to harness the benefits of migration policies. Circular migration arrangements have been pro-actively advocated by the country at international events and bilateral agreements have been reached with France and Canada already. Some of these initiatives are more focused on emigration of unskilled and semi-skilled migrants. More recently, however, there is growing interest among policymakers to tap into the high skilled diaspora as a way to boost entrepreneurship, investment and technology adoption. Mauritius has experienced several waves of emigration with the first one starting independence (1968). Today, it is estimated that approximately two hundred thousand Mauritians (15 percent of the population or 36 percent of the domestic labor force) live abroad. The IOM has financed a Diaspora Mobilization Strategy in 2007 and main conclusions were: (i) encourage the diaspora to invest in projects of the Empowerment Program; (ii) involve the Diaspora in collaborative research and development projects; (iii) advise banks to provide attractive schemes offering competitive returns to the diaspora, and (iv) reach out to the Diaspora through the Board of Investment. High skilled professionals and experienced workers with successful careers abroad represent a potentially rich source of wealth generating capacity for Mauritius. However, there is only scattered knowledge about who they are. Hence, development of “smart” databases to inform policy should be a priority. By “smart” we mean that there is no need for being comprehensive in data collection efforts, but rather to devise efficient ways of gathering the necessary information. Focusing data gathering efforts in Australia, UK, South Africa and Canada seem clear choices. Possible options are: (i) explore partnership with foreign governments to use existing administrative datasets and/or surveys of the host countries containing nationality information (this may include history of student visa applications); (ii) explore collaborative partnerships between BOI, embassies and consulates to identify and approach high skill Mauritians abroad; (iii) build upon the networks of nurse practitioners (particularly in the UK) to support development of the medical services sector in Mauritius; (iv) work with selected universities that usually receive Masters and PhD Students from Mauritius to compile a list of graduates; (v) contact workers presently in Mauritius who studied abroad and may have developed contacts with high skill nationals living overseas. Additionally, the public sector should strive to attract Mauritians with international experience to senior management positions. This can be a potentially powerful channel for injecting emerging ideas into the functioning of domestic institutions and policy environment, which is especially relevant in the case of a small and remote country aiming at global competitiveness. The Government should then be ready to adopt a multi-pronged approach in benefiting from the Mauritius Diaspora. 76. As Mauritius accelerates transition towards a high value added economy, returns to education will need to increase so that potential workers find incentives to invest in human capital over time. Wage equations estimated with the 2007 Continuous Multi-purpose Household Survey indicate 48 that workers with post-secondary and secondary education attainments earn, respectively, 59 percent and 23 percent more than workers with primary or no education after controlling for occupation and sector. When controlling for experience as well (20 years), estimated wage premiums rise to 73 percent (post- secondary) and 29 percent (secondary). When controlling only for experience (no controls for occupation and sector), estimated wage premiums rise further to 127 percent (post-secondary) and 42 percent (secondary)- see Figure 21. Though data and methodological issues prevent a one-to-one comparison with other studies, it is possible to conclude that returns to education in Mauritius are relatively low. According to Psacharopoulos and Patrinos (2002), the world average rate of return to another year of schooling is 10 percent and they are as follows for selected countries/regions: 13.1 percent (Singapore, 1998), 12 percent (Chile, 1989), 10.6 percent (India, 1995), 9.4 percent (Malaysia, 1979), 10.7 percent (middle income), and 7.4 percent (high income). 77. Beyond low educational rates of returns, wages for skilled labor remain relatively low in Mauritius compared to competing countries. Table 6 below indicates the annual salary for a graduate in computer engineering in a sample of countries (adjusted for the cost of living using the Economist Big Mac Index). Such a figure for Mauritius ranges around US$15,00045 and it is low when compared to other countries. Table 6: Wage Level Comparison Country Big Mac™ Price in $A Graduate Salary in $A Minutes / Big Mac™ Australia $3.20 $40,000 10.0 Canada $3.40 $49,800 8.5 Denmark $5.90 $49,000 15.0 Italy $3.00 $33,000 11.3 Japan $3.00 $56,000 6.7 Malaysia $1.80 $10,000 22.5 New Zealand $4.10 $35,000 14.6 Singapore $2.80 $24,000 14.6 South Africa $2.70 $17,000 19.8 Sweden $5.40 $47,000 14.3 UK $4.45 $44,000 12.6 USA $3.95 $60,000 8.2 Mauritius $ 3.00 $15,000 25.0 Comparison dated 30 June 2005 (data for Mauritius if for 2008). The last column indicates how many minutes are required to buy a big mac. Source: http://www.apesma.asn.au/students/careers/big_mac_index.asp 78. McDonald and Yao (2003) and Porter (2004) argue that Remuneration Orders (labor market regulations issued by the Ministry of Labor detailing employment conditions) compress the wage schedule by defining wage structures across occupations and sectors. This would then narrow differences in skill returns across workers and explain the results above. The Remuneration Orders still exist, but one could question to what extent they really drive the low returns to skills since many of their aspects are not binding today anymore; for instance, actual wages paid are already predominantly above mandated minimum wages in the sectors - World Bank (2007). In any case, the compression of wage structure across skills is consistent with the historical role of labor markets as a vehicle for social pact among Mauritians. Perhaps more importantly though, low skills returns also reflect the fact that (i) jobs in the service sector 45 See http://www.gov.mu/portal/sites/seca/files/2008%20Mauritius%20ICT%20BPO%20Salary%20Survey%20Public%20Report%20v 4.pdf?pg=4_12&id=43 49 are not of particularly high value-added yet and (ii) less qualified workers in sectors undergoing restructuring have been made more productive on average as the result of increasing investment in physical capital and lay-offs (particularly in the context of vertical integration occurred in the textile sector). 79. Going forward, however, it is expected that educational returns among high skilled will increase faster than for other groups as the economy moves up the technology ladder. As a matter of fact, this process is necessary to retain talented Mauritians at home. Higher returns to education at the secondary level are also important to boost incentives for human capital accumulation and avoid lack of motivation among students that anticipate little chance of reaching a post-secondary degree. 80. Last but not least, labor markets will lose gradually its role as the vehicle for a social pact through reduced wage inequality and high job security. The pace toward this transition will be determined to a large extent by economic and political factors. Still, the virtuous cycle between competitiveness and development as well as retention of high skilled labor will ultimately require strong wage growth at the high end of the skill spectrum. The challenge for policymakers will be to reduce this pressure by pushing students and workers toward higher education and vocational training programs so that an increasing share of the labor force will be able to take advantage of those gains over time. Figure 21 Returns to Education No control for experience, control for sector and occupation Control for experience (20 years), control for sector and occupation Post Secondary Secondary Control for experience (20 years), no control for sector or occupation 0 20 40 60 80 100 120 140 Wage premium (%) on pooled base group (no education and primary education) Source: CMPHS Concluding remarks and summary of policy recommendations 81. The Mauritian labor market has adapted well to both the economic changes brought by trade preference removal and the 2006 reform program. Additionally, in early 2009, the institutional underpinnings allowing workers and firms to cope with transformations have been significantly modernized through new labor market laws. Hence, a general assessment regarding the Mauritian labor markets’ ability to deliver job creation while undergoing adaptation is favorable. Despite positive prospects, some important challenges remain. They relate to the readiness of the low and high ends of the 50 skill spectrum in benefiting from and contributing to economic transformations in course. Tackling bottlenecks at both ends is important to strike a balance between wealth generation and social stability. 82. A summary of policy recommendations follows next: At the Low-end of the labor market: (a) Address education bottlenecks in primary and secondary education as a matter of priority. Low educational attainment is the fundamental driver of labor market vulnerability. Despite progress in the education sector, CPE pass rates are low and not trending up. SC and HSC pass rates also have ample room for improvement. These are not novel problems, yet they demand urgent resolution given their long-term impact. The Government must be bold and innovative on this matter. One option is to have the Ministries of Finance and Education stepping up efforts to collaborate through recent PFM reforms. In particular, the Program Based Budgeting (PBB) and Performance Management Systems (PMS) are two important tools to be perfected in order to enhance implementation pace and allocational efficiency across programs. Making the PBB/PMS process more a policy instrument than a bureaucratic requirement is crucial, and a big push in that direction could be pioneered in the education sector. Competent and dedicated teams in Finance (SMST) and Ministry of Education provide the necessary human resources environment for this to happen. Finance could consider the possibility of allocating to the Ministry of Education additional resources that would be distributed among the various programs of that Ministry on the strict basis of their “performance indicators” as agreed on the PBB exercise. Such a pilot initiative, even if in a small scale, would work as a dry run for using PFM reforms towards allocational efficiency, a potential that has not materialized yet. Maintaining communication throughout the year leading up to a smooth and predictable budget preparation that supports a coherent and well- sequenced medium-run strategy is also crucial. The bottlenecks in primary and secondary education also relate to the level of cognitive skills in math and sciences among students. It is essential for Mauritius to participate in international benchmarking exercises such as the Program for International Student Assessment (PISA) or Trends in International Mathematics and Science Study (TIMSS) to inform policies aiming at the improvement of educational outcomes. (b) Support youth with low education attainment. To alleviate poverty and reduce labor market vulnerability in the short and medium run, it is necessary to adopt a multi-pronged strategy for making the youth with low education attainment as productive as possible. Firstly, the Life Skills Training (LST) program should play a central role in any active labor market policy targeting the unskilled. Expanding the scope and improving effectiveness of the LST in partnership with the private sector is important to improve employability of the unskilled. The Government should play a pro-active role in raising awareness about the program, particularly among SMEs. Secondly, special migration arrangements should continue to be used as an instrument to place abroad those unskilled or semi-skilled workers with weak prospects at home. The Government should also play a supporting role to boost their chances of success as discussed in the text. Thirdly, on-going work from the World Bank is focusing on articulation of pathways between TVET and general education. This is particularly important, especially as specific consideration is given to students that fail the CPE exams (Mauritius cannot afford to lock 35 percent of its 11- 51 year-old children every year in an education stream that dramatically reduce their productivity as adults). (c) Refocus social protection. On-going efforts to refocus the social protection system should be maintained to ensure efficient targeting, and particularly that the most poor and vulnerable are not left unattended (which is currently happening to some extent). Children from vulnerable households (as identified in the text) should be an absolute priority. The guiding principle for a refocused social protection system should be to align design and objective of the various programs. In particular, it is important to differentiate among initiatives that cover (i) insurmountable difficulties which make people unemployable or unable to earn a policy- determined minimum income, (ii) shocks that temporarily depress labor market engagement of workers, and (iii) the objective of raising a worker’s productivity level (which is not really a social protection issue unless the worker is currently below the policy-determined minimum income). The Government should apply quasi-experimental impact evaluation techniques to key existing programs in order to inform the refocusing of the system. It is also important to recognize the linkages between the existing welfare state and incentives for labor market participation among unskilled workers. In this context, the effectiveness of active labor market programs for the unskilled is likely to be heavily affected by the policy-determined level of minimum income which the government would like to guarantee. If that level is “too high” compared to what the unskilled can earn in the labor market, a rational choice would be not to work. By the same token, it is important not to cast as active labor market programs those initiatives that hold little potential for labor market re-engagement of the targeted group. The situation of older women displaced from textile sector is an example which would benefit from careful consideration. Perhaps the issue would be better treated as one of social safety net. Under the leadership of the Ministry of Social Security, on-going support from the UNDP and World Bank on poverty analysis can help to further clarify trade-offs faced by the policymakers. At the high-end of the labor market: (a) Tailor active labor market programs for skilled workers. The PTP has performed very well in placing trainees in the ICT sector. The National Empowerment Foundation should continue to capitalized on its achievements by further improving the likelihood of successful employment at the end of the trainee tenure. To this end, the design of the training component (in terms of relevance for future employers) and the ability to identify promising matches between firm and worker (particularly among SMEs) are valuable competencies to perfect. Additionally, the Levy Grant Scheme (LGS) administered by the HRDC should be strategically used to promote the acquisition of higher skills along the value-chain over the lifetime of the worker. To this end, coordination with the BOI is important as the latter is in a good position to assess investment appetite in the market. In particular, collaboration between HRDC and BOI should help to identify potential entrants in the ICT sector that are holding back on initial investments due to lack of specific skills and preventing upward movement in the technology ladder. Anecdotal evidence indicates that this is the case for some software accreditation degrees, which effectively represents a bottleneck for breaking into KPO. Similar bottlenecks are likely to exist in other areas with potential to grow such as LBOI and medical services. In those cases, “training packages” to open a 52 business in Mauritius could be offered. While respecting private sector needs in the provision of training, the LGS should also play a pro-active transformational role in the economy by fostering domestic career development of high skilled workers and providing “human capital incentives” to nascent sectors. HRDC should also apply quasi-experimental impact evaluation techniques to the LGS with the view to assess and improve effectiveness of the program. It would be interesting to evaluate not only workers, but also firms (particularly exporting companies). (b) Enhance links with university students. Mauritius should nurture the keenness demonstrated by its talented young nationals on acquiring international experience. Supporting their individual aspirations will maximize motivation and long-run potential, while opening up opportunities for government policies. For instance, merit scholarships for recent university graduates to study abroad after they fulfill a requirement of spending a short stint (1-2 years) working in emerging sectors of the Mauritian economy. Such type of initiative would also strengthen early linkages with talented Mauritians who in the medium-run would become part of the high-skilled diaspora. Application and selection process for the scholarship must be transparent and based on objective criteria to avoid credibility issues that could severely diminish the motivational impact of the program. Upon completion of the master’s abroad, the student would have a time window to return and work in Mauritius for some time - the government could also exploit other possibilities of “paying back” that did not involve physical return to the country, but explicitly contributed to diaspora policies. Additionally, the government should track experiences of recent university graduates in the domestic markets and systematically use statistical/econometric techniques to inform policies as illustrated in the text. Overall, efforts to systematically collect data among all tertiary education institutions in Mauritius and monitor emerging trends to inform policies are important steps to gain solid understanding of inefficiencies in the use of scarce high skilled labor. The Human Resources Development Council has a research division in charge of labor market monitoring, so the institutional underpinnings for such an exercise already exist which could be carried out in partnership with the Tertiary Education Commission. A network of independent researchers and multilateral organizations could provide support in terms of human resources for this endeavor. (c) Develop innovative data gathering exercises on the Mauritian diaspora to inform policy. High skilled professionals and experienced Mauritians with successful careers abroad represent a potentially rich source of wealth generating capacity for Mauritius. However, there is only scattered knowledge about who they are and development of databases to inform policy should be a priority. Focusing data gathering efforts in Australia, UK, South Africa and Canada seem clear choices. Possible options are: (i) explore partnership with foreign governments to use existing administrative datasets and/or surveys of the host countries containing nationality information (this may include history of student visa applications); (ii) explore collaborative partnerships between BOI, embassies and consulates to identify and approach high skill Mauritians abroad; (iii) build upon the networks of nurse practitioners (particularly in the UK) to support development of the medical services sector in Mauritius; (iv) work with selected universities that usually receive Masters and PhD Students from Mauritius to compile a list of graduates; (v) contact workers presently in Mauritius who studied abroad and may have developed contacts with high skill nationals living overseas. Additionally, the public sector should strive to attract Mauritians with 53 international experience to senior management positions in the public sector. This can be a potentially powerful channel for injecting emerging ideas into the functioning of domestic institutions and policy environment, which is especially relevant in the case of a small and remote country aiming at global competitiveness. 83. All policy recommendations involve costs, so it is important to prioritize. The initiatives proposed above are not free. They consume resources in the form of money, human capacity and/or political capital to implement them. As a result, it is important to define priorities both for the short and longer run. The key message remains that Mauritius is on track to transform itself from a low to high value added economy following the path of successful emerging countries in East Asia and Latin America. Such a path requires nonetheless the transformation of the labor market that needs to become the instrument of economic growth rather than the stabilizing factor that has traditionally played in Mauritius. This transition is possible if a growing number of workers are absorbed by technology-intensive industries so that their productivity will, in turn, generate significant competitiveness gains for those industries over time. Consolidating this virtuous circle by strengthening and attracting skilled labor is central for the success of the current strategy followed by the Government. Simultaneously, it will remain crucial that the number of left-out during this adjustment process be minimized so to preserve social and political stability. . To tackle these challenges, Mauritius should leverage partnerships with governments of other countries, civil society and development partners, but first and foremost with the private sector. 54 References Berthelemey, J. C. 2001. The Role of Capital Accumulation, Adjustment and Structural Change for Economic Take-Off: Empirical Evidence from African Growth Episodes, World Development. Crain, M. 2005. The Impact of Regulatory Costs on Small Firms, Small Business Administration. Echevin, D. and Bastos, F. 2009. Labor income and employment in a transition economy: Mauritius 2001- 2007. Government of Mauritius, 1997, Vision 2020: The National Long-Term Perspective Study, Port Louis: Ministry of Economic Development and Regional Cooperation. Government of Mauritius, 2009, Report of the Permit Review Committee. IMF, 2010, “Mauritius: 2009 Article IV Consultation - Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Mauritius” Jacobs and Associates, 2009. Recommendations for Business Licensing Reforms in Mauritius Jaunky, V. 2009. A Study on School-to-Work Transition of Graduates from the University of Mauritius. Juhn, C. & Murphy, K. M & Pierce, B., 1993. Wage Inequality and the Rise in Returns to Skill, Journal of Political Economy, vol. 101(3), pages 410-42, June. Kim, J. S. 2005. Regulatory Reform: Processes and Strategies, A Case of Korean Regulatory Reform. Krugman, P., 1994, The Myth of Asia’s Miracle, Foreign Affairs, 73:6. Meade, J. E., et al., 1961. The Economics and Social Structure in Mauritius – Report to the Government of Mauritius, London: Methuen. McDonald, C. and Yao, J., 2003, Mauritius: Unemployment and the Role of Institutions (November 2003). IMF Working Paper, Vol. , pp. 1-18. Porter, N. 2004. “Wage Compression, Employment Restrictions, and Unemployment: The Case of Mauritius.” IMF WP/04/205, International Monetary Fund, Washington DC. Rahman, A. 2009. Tackling Corruption through Tax Administration Reform, investment climate in practice, IFC, n. 3. Rodrik, D, 1996. "Economic Growth in East Asia: Accumulation Versus Assimilation (Comment on Collins and Bosworth, 1996)," Brookings Papers on Economic Activity, 2, 135–203. Ruiz, N. 2008. Managing Migration: Lessons from the Philippines. The World Bank. 55 Subramanian, A. and Roy, D., 2001. "Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrik?", IMF Working Papers 01/116. World Bank. 2009. Lessons for Reformers: How to Launch, Implement and Sustain Regulatory Reform. FIAS. World Bank, 2009(b). Mauritius Social Protection Review and Strategy. World Bank. 2009 (c). Investment Climate Assessment Mauritius 2009. World Bank, 2007. Mauritius Country Economic Memorandum: Managing Change in a Changing World., Washington, DC. World Bank, 2006. From Global Preferences to Global Competitiveness – Report of the Aid for Trade mission. Washington, DC. Young, A 1992. "A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 13-64 National Bureau of Economic Research, Inc. 56 Appendix Juhn-Murphy-Pierce decomposition: The change in earnings inequality can be decomposed using the Juhn-Murphy-Pierce methodology. In order to isolate the effect of skills, a Mincer earnings equation is estimated as: Yit X it t u it , where Yit is the log real hourly wage for individual i in year t, X it is a vector of individual characteristics, and u it is the unobservable component. These residuals can be expressed as a follows: u it Ft 1 ( it | X it ) where Ft 1 ( it | X it ) is the inverse cumulative residual distribution for workers with characteristics X it in year t, and it is an individual’s percentile in the residual distribution. Three hypothetical earnings distributions can be constructed from this framework. First, we use the average coefficients over time and predict earnings for all workers in each year. We obtain: 1 Yit1 X it Ft ( it | X it ) Using this hypothetical earnings distribution we can determine how changes in the distribution of observables have affected inequality. Second, we allow both the observable characteristics of individuals and skill returns (observable prices) to vary over time with the residual distribution held fixed, so that we get: 1 Yit2 X it Ft ( it | X it ) Finally, if we allow observable quantities and prices and the distribution of residuals to vary through time, we obtain Yit . Then we attribute temporal change in inequality in the Yit1 distribution to changes in observable quantities. Furthermore, we attribute any additional change in inequality in Yit2 to changes in observable prices, and finally we attribute any additional changes in inequality for Yit beyond those found in Yit2 to changes in the distribution of unobservables. The table below presents the estimated results 57 Observable and unobservable components of change in labor income inequality, Mauritius, 2001- 2007 Observable Observable Unobservable Log wage differentials Total quantities prices quantities and prices Change % Change % Change % Change % 2001-2003 Male 90th-10th -0.0284 100.0 -0.0297 104.6 -0.0080 28.1 0.0093 -32.8 90th-50th 0.0004 100.0 -0.0085 -2176.1 -0.0020 -521.0 0.0109 2797.1 50th-10th -0.0288 100.0 -0.0212 73.7 -0.0060 20.7 -0.0016 5.6 Female 90th-10th 0.1273 100.0 0.0868 68.2 -0.0217 -17.0 0.0622 48.9 90th-50th 0.1023 100.0 0.0996 97.4 -0.0135 -13.2 0.0162 15.8 50th-10th 0.0251 100.0 -0.0128 -51.0 -0.0082 -32.8 0.0460 183.7 All 90th-10th -0.0087 100.0 -0.0109 124.7 -0.0140 160.3 0.0162 -185.0 90th-50th 0.0179 100.0 0.0114 63.4 -0.0004 -2.3 0.0070 38.9 50th-10th -0.0267 100.0 -0.0223 83.5 -0.0136 51.0 0.0092 -34.4 2003-2005 Male 90th-10th 0.0862 100.0 0.0205 23.8 -0.0047 -5.5 0.0704 81.7 90th-50th 0.0931 100.0 0.0233 25.0 0.0300 32.2 0.0399 42.8 50th-10th -0.0069 100.0 -0.0028 40.1 -0.0347 499.1 0.0305 -439.2 Female 90th-10th 0.0289 100.0 -0.0360 -124.7 0.0563 195.0 0.0086 29.8 90th-50th -0.0153 100.0 -0.0865 566.3 0.0584 -382.5 0.0128 -83.7 50th-10th 0.0442 100.0 0.0504 114.2 -0.0021 -4.7 -0.0042 -9.5 All 90th-10th 0.0738 100.0 0.0017 2.3 0.0259 35.2 0.0461 62.5 90th-50th 0.0711 100.0 0.0068 9.5 0.0426 59.9 0.0218 30.6 50th-10th 0.0027 100.0 -0.0051 -189.7 -0.0166 -623.1 0.0244 912.9 2005-2007 Male 90th-10th -0.0362 100.0 0.0058 -16.1 -0.0107 29.4 -0.0314 86.7 90th-50th -0.0321 100.0 0.0115 -35.7 -0.0197 61.5 -0.0239 74.3 50th-10th -0.0041 100.0 -0.0056 138.3 0.0091 -222.9 -0.0075 184.6 Female 90th-10th -0.0101 100.0 0.0296 -294.1 -0.0492 489.7 0.0096 -95.6 90th-50th -0.1008 100.0 -0.0326 32.4 -0.0670 66.4 -0.0012 1.2 50th-10th 0.0908 100.0 0.0622 68.5 0.0177 19.5 0.0108 11.9 All 90th-10th -0.0723 100.0 -0.0059 8.2 -0.0369 51.1 -0.0294 40.7 90th-50th -0.0557 100.0 -0.0047 8.5 -0.0290 52.1 -0.0220 39.5 50th-10th -0.0166 100.0 -0.0012 7.3 -0.0080 47.9 -0.0074 44.8 2001-2007 Male 90th-10th 0.0216 100.0 0.0047 21.8 -0.0114 -52.9 0.0284 131.1 90th-50th 0.0614 100.0 0.0286 46.6 0.0137 22.4 0.0190 31.0 50th-10th -0.0398 100.0 -0.0239 60.1 -0.0252 63.3 0.0093 -23.4 Female 90th-10th 0.1462 100.0 0.0872 59.7 -0.0225 -15.4 0.0814 55.7 90th-50th -0.0138 100.0 -0.0200 144.7 -0.0107 77.4 0.0168 -122.1 50th-10th 0.1600 100.0 0.1072 67.0 -0.0118 -7.4 0.0646 40.4 All 90th-10th -0.0072 100.0 0.0132 -183.0 -0.0417 577.1 0.0213 -294.2 90th-50th 0.0334 100.0 0.0176 52.8 0.0072 21.7 0.0085 25.6 50th-10th -0.0406 100.0 -0.0044 10.8 -0.0490 120.6 0.0127 -31.4 58 Returns to Education Marginal effect of education with 20 years of experience, Mauritius, 2001-2007 Secondary Postsecondary 2001 2003 2005 2007 2001 2003 2005 2007 Gender (with occupation and sector dummies) Male 0.26 0.24 0.25 0.25 0.59 0.65 0.65 0.59 Female 0.27 0.32 0.27 0.34 0.72 0.82 0.89 0.87 All 0.28 0.28 0.27 0.29 0.66 0.73 0.77 0.73 Gender (without occupation and sector dummies) Male 0.37 0.34 0.35 0.35 1.13 1.11 1.16 1.11 Female 0.58 0.61 0.56 0.58 1.50 1.51 1.63 1.52 0.44 0.43 0.42 0.42 1.26 1.26 1.34 1.27 Occupation Professional, technical, admin., executive, and managerial workers 0.79 0.74 0.60 0.28 1.25 1.25 1.16 0.82 Clerical and sales workers 0.66 0.58 0.63 0.64 1.03 1.06 1.09 1.06 Production and service workers 0.23 0.23 0.23 0.26 0.56 0.64 0.84 0.72 Sector Agriculture, hunting, forestry, and fishing 0.19 0.31 0.21 0.19 0.46 1.19 1.22 1.35 Mining and quarrying - - - - - - - - Manuf. of food, beverage, and tobacco products 0.24 0.41 0.31 0.35 1.45 1.23 1.28 1.21 Manuf. of textiles, leather, fur, wearing apparel, and footwear 0.29 0.24 0.21 0.32 1.17 0.98 1.08 1.03 Manuf. of wood and woodproducts 0.45 0.30 - 0.52 - - - - Manuf. of paper, paper products, printing, and publishing 0.30 0.28 0.33 0.37 1.69 1.00 0.98 1.17 Manuf. of chem., rubber, plastic, petroleum, and coal products 0.34 0.35 0.31 0.43 1.72 1.38 0.61 1.86 Manuf. of non-metallic mineral products - - - - - - - - Manuf. of basic metals, metal products, andmetal parts 0.16 0.13 0.42 0.25 0.58 1.13 1.54 0.80 Manuf. of machinery and transport equipment and parts - - - - - - - - Other manufacturing industries 0.27 0.37 0.30 0.13 1.31 - 0.90 0.79 Electricity, gas, steam, water works, and water supply 0.58 0.17 0.80 0.75 0.76 1.21 1.34 1.23 Construction 0.19 0.18 0.13 0.24 1.09 0.64 1.27 1.13 Wholesale and retail trade 0.53 0.46 0.45 0.50 1.28 0.91 1.15 1.18 Hotels and restaurants 0.33 0.31 0.39 0.32 1.14 1.14 1.28 1.08 Transport, storage, and communications 0.38 0.44 0.30 0.27 1.24 1.04 1.03 1.00 Financial interm., real estate, renting, and business activities 0.62 0.45 0.57 0.55 1.36 1.16 1.50 1.55 Community, social and personal services activities 0.63 0.70 0.63 0.58 1.27 1.33 1.38 1.26 59 Indexed real hourly earnings, all workers, 2001-2007 1,30 1,20 1,10 10th 50th 1,00 90th 99th 0,90 0,80 0,70 2001 2002 2003 2004 2005 2006 2007 Indexed real hourly earnings, male workers, 2001-2007 1,30 1,20 1,10 10th 50th 1,00 90th 99th 0,90 0,80 0,70 2001 2002 2003 2004 2005 2006 2007 Indexed real hourly earnings, female workers, 2001-2007 1,30 1,20 1,10 10th 50th 1,00 90th 99th 0,90 0,80 0,70 2001 2002 2003 2004 2005 2006 2007 60 Changes in labor income and labor supply for 36 demographic groups, 2001-2007 .5 0 -.5 -1 -1.5 -1 -.5 0 .5 1 Changes in log supply Changes in log wage Fitted values Changes in labor income and labor supply for 18 male demographic groups, 2001-2007 .1 0 -.1 -.2 -.3 -.4 -1 -.5 0 .5 1 Changes in log supply Changes in log wage Fitted values Changes in labor income and labor supply for 18 female demographic groups, 2001-2007 .5 0 -.5 -1 -1.5 -1 -.5 0 .5 1 Changes in log supply Changes in log wage Fitted values